Why Bitcoin does not have a market cap

Many tweets and RSS feeds arrive on my monitor every day claiming that the Bitcoin market cap has broken through another big milestone or more recently that the Bitcoin market cap has collapsed. Bitcoin does not really have a market cap, the same way that gold or currencies do not have market caps. Naming the total value of Bitcoins in this way removes people from what Bitcoin was fundamentally designed to be and what it functions as today.

Market capitalisation is defined in Investopedia as

The total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to sales or total asset figures.

It is tempting to take the second sentence to mean we should multiply the total number of Bitcoins circulation by the price of an individual Bitcoin and call it the market cap. The similarity between Bitcoin and shares are that they are both scarce. However , shares are not the only scarce items that investors hold, they also hold bonds, commodities and other investment instruments.

Bitcoin was originally intended to be a decentralised payment network where the unit of account was Bitcoin. Perhaps in its original intentions it was not even meant to interact with government issued currencies. Bitcoin, as the unit of account has certain attributes that also made it a currency. In particular, there is divisibility, limited fungibility and well defined property rights which make it theoretically a good store of value. Although, it was not perhaps in the original intentions of the protocol, developers are now creating new protocols that build on top of Bitcoin to provide more complex financial products and alternative use cases. In this way, the Bitcoin blockchain where the unit of account, a Bitcoin, becomes the most fundamental unit of account but there are more platforms and new units built on top. Perhaps eventually transacting on the chain will become a privalege or used for specific services while other transactions will take off the chain in a trusted environment. This resembles our existing financial system in which M1 represents the notes, coins and current accounts. In the United Kingdom, M4 contains: sterling notes and coin; sterling deposits, including certificates of deposit; commercial paper, bonds, FRNs and other instruments of up to and including five years’ original maturity issued by UK MFIs;claims on UK Money Financial Institutions arising from repos (from December 1995);estimated holdings of sterling bank bills and 35% of the sterling inter-MFI difference.

Suffice it to say that the monetary value of broad base money measure M1 captures an estimate of how much basic money that can be used as a store of value and a means of exchange is floating around the economy. Higher orders of money measures capture more complex layers of financial products. While these products have not been built upon Bitcoin, they are under development and we will update our measure of the money supply accordingly. For now we refer to the total dollar value of Bitcoin as M1: The narrow money stock.


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