Deconstructing the Bitcoin Market Cap by Vinny Lingham

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A little over two years ago, I came across a fascinating piece by serial entrepreneur Vinny Lingham which predicted a flat-to-down bitcoin price in the medium term. I highlighted the piece in the post, Why is the Bitcoin Price So Weak? The reason I found the article so compelling was not just the well thought out thesis, but also because he remained a bitcoin bull. As someone who spent 10 years professionally observing the financial markets on Wall Street, I know how difficult it is to be bullish and at the same time admit the price won’t be going anywhere for a while.

Ever since that post was published, I waited anxiously for a followup signaling that the weakness was over. I had to wait two years, but in early May 2016 he publicly turned very bullish. I highlighted this shift in the piece, Vinny Lingham on the Bitcoin Price – Prepare for the “Mother of All Short Squeezes”. One month later, the price is +25%.

Seemingly inspired by the recent action, Vinny has been writing more frequently as of late and he just published another piece titled, Deconstructing the Bitcoin Market Cap.

In it, he argues that when looking at bitcoin price charts it’s important to keep in mind several factors other than just the nominal price. Due to the nature of the network’s supply curve, there has been a material amount of dilution since the prior all time high achieved in late 2013. As such, he argues that looking at market cap is probably more important than nominal price when determining a new “breakout level.” He also thinks it’s meaningful to adjust for lost/destroyed coins when thinking about an adjusted market cap high. Putting all this together, he thinks the actual adjusted market cap price per BTC is somewhere around $700. As such, he thinks that level will prove to be major resistance, but that we’ll witness the mega up move after a period of consolidation around that area.

For more, here’s the entire post:

Deconstructing the Bitcoin Market Cap

There is clearly a widely distributed misunderstanding of what a market capitalization actually is, and specifically as it refers to crypto currencies, and in particular, Bitcoin. I felt compelled to write this post as a result. This is by no means an exhaustive analysis, but it’s a good start to help clear up some market confusion. Please recommend this post on Medium and distribute this post to financial writers/journalists covering Bitcoin to help clear up the confusion.

Let’s start with definitions:

“Market capitalization is just a fancy name for a straightforward concept: it is the market value of a company’s outstanding shares. This figure is found by taking the stock price and multiplying it by the total number of shares outstanding.” — Investopedia

Now, to be absolutely clear, this definition was meant to apply to stocks — not commodities and definitely not digital commodities. Given the comparison is a semi-reasonable proxy for Bitcoin, and it’s widely understood by the financial press, let’s work with it.

All data from this post comes from Blockchain.info, unless otherwise stated.

  • Total Bitcoins mined to date = 15.6m
  • Total Bitcoins outstanding = 5.4m
  • Current Bitcoin Price = $528
  • Rate of new coins issued — 3,600/day until next month
  • Bitcoins lost/destroyed/missing = 2,5m (approx — re: Coinbuzz)
  • Reported All-Time Bitcoin Price= $1,151 (VWAP across all exchanges)
  • Reported All-Time High Bitcoin “Market Cap” = $13,8 Billion

You may have already have guessed where I’m heading with this, based on the data above, but nevertheless, let’s explore:

  1. If a company is issuing new 25 new shares every 10 minutes, clearly this would constitutes a stock split (continuously) and therefore the historical price of that stock would need to be adjusted to reflect the stock split (this is how it works today). However, in “Bitcoinland”, this is ignored. It’s just too convenient for us to use the biggest numbers possible to reinforce our dogmatic and unfettered belief in Bitcoin as the solution to all global problems and to continue pumping up the price (/end sarcasm).
  2. If a shareholder loses their stock certificates and there is no other ledger or proof of ownership, the real market cap of the company would need to be adjusted as those stockholders would be unable to trade their shares, earn dividends or redeem them. The shares are gone and therefore outstanding shares would need to be adjusted. This has happened before, especially pre-electronic trading era. The general consensus is that 1.5m-4m Bitcoins are gone or lost forever. This is VERY material — I believe estimating that 2.5m is a healthy estimate for coins we will never see again, including Satoshi’s coins (risk percentage adjusted). The difference with Bitcoin is that if a hard drive is deleted, you will never recover those coins — it’s not stolen, it’s gone. Gold always remains on earth, even if the Spanish armada sinks in the middle of the Atlantic — Bitcoins don’t.
  3. You absolutely cannot use an ATH for a share price if 3.5m shares have been issued (22.5% dilution has occurred) — it must be adjusted! Equally, an ATH for market cap must factor in those missing/lost shares.

I’ve done a quick analysis, based upon my understanding of how the Bitcoin world looks. The dates I’ve used have some historical and some personal arbitrary significance.

The first 2 dates are the two prior peaks (bubbles) of Bitcoin prices that many people will remember. The next 2 dates relate to my first two Bitcoin blog posts, Finding Equilibrium & Bitcoin Rising. July 10, 2015 is approximately 1 year before the Bitcoin rewards are halved this year on July 10th, and May 29th is yesterday, but 3 weeks after my post earlier this month on Bitcoin 2016, predicting the current short squeeze which started in earnest this weekend.

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Based upon my analysis, the ATH price for Bitcoin is $697.19 — which most Bitcoin technical & trading analysts, like BitcoinBullBear, will tell you represents a major breakout level for Bitcoin and will likely see a lot of resistance. This is because it IS an ATH for Bitcoin, not a technical level. The technical levels essentially confirm what I’m saying — even though the technical analysis is not factoring in the points above, it’s very clear from market behavior.

The purpose of this post was merely to set the record straight. So, if you’re in the Bitcoin world, please help educate the financial community that Bitcoin’s ATH is not c. $1151, but in fact c. $700 (and this adjusts, the longer it takes to get there, given the number of new coins issued daily). The same way that the Apple share price all time high is not $800 (they did a 6–1 stock split — so it’s $133).

An alternative way of looking at it, for comparison purposes, is that Bitcoin is trading at $733 right now (as opposed to $528), relative to its previously reported ATH of $1151. I would love to see some technical analysts and chartists use my methodology, above, to replot and recalculate trendlines.

When I predicted that Bitcoin will end the year at $1,000+, it’s on an net market cap adjusted basis — so therefore imputed market cap will be over $15bn — which will most certainly be an ATH for Bitcoin…

Edit & Authors note: I’m not saying this is a akin to a stock split. I’m inferring that when a stock split happens, the market capitalization remains the same for the company BUT the stock price is adjusted accordingly. This does not happen as the number of Bitcoins in circulation increases for no value every 10 minutes.

After reading the above, I realized many people remain confused about what Vinny means when he refers to a huge “short squeeze.” To get some more insight into his thinking, I called him up and we chatted. Here’s the general thesis.

Roughly every 10 minutes, a Bitcoin block is created and with that 25 new bitcoins are mined into existence. Every few years the number of coins created every 10 minutes is cut in half. The last time this happened was in late 2012, the next time will be in July 2016. So how will this create a short squeeze?

First let’s think about the mining sector. With the success of the Bitcoin ecosystem, mining has become big business. There are a certain amount of miners in existence and they’re all chasing the same coins. The problem for the industry is that the amount of coins up for grabs is about to be cut in half, while the number of miners competing for them remains roughly the same. Economics 101 tells you this will create a problem, and ultimately a major shakeout in the industry. Those who aren’t the most efficient, or don’t have the ability to stay in business will close down. So why would this create a short-squeeze?

Vinny thinks the mining industry is net short. Thus, when some of them inevitably run into problems they’ll have no choice but scramble to cover and square away their books. I want to note that I have no insight at all as to whether the mining industry is short or not. It’s not something I follow closely. What I am saying is Vinny thinks it is. If he’s right, then this could create serious fireworks.

Stay tuned.

For Vinny’s prior pieces, see:

Guest Post: Why is the Bitcoin Price So Weak?

Vinny Lingham on the Bitcoin Price – Prepare for the “Mother of All Short Squeezes”

In Liberty,
Michael Krieger

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1 thought on “Deconstructing the Bitcoin Market Cap by Vinny Lingham”

  1. until the u.s. market crashes bitcoin will not crash. and it most certainly will crash with the next stock market crash.

    just as sure as people put their money in ART and chattel, and the price of that chattel CRASHES during a crash, so to will bitcoin crash.

    the yuan escape narrative is temporary and bullshit.

    bitcoin is a success by SURVIVING even at 100$. that is a WILD success for a so called ‘non-soveriegn’ currency that isn’t chattel or bullion like gold art fancy cars.

    i guess i really dislike the never ending pumping of bitcoin. it’s gotta stop. silicon valley and it’s startup get rich quick crowd is selling financial libertarianism like a religion with bitcoin as the indulgences. freedom is not bitcoin. freedom is a mindset, it is using the fruits of your labor wisely and to the best of your ability. it is working and saving. it is NOT everyone crowding into a fundamentally digital form of speculation. if all things digital are spied upon then there is every reason to even caution people who are conservative libertarians against bitcoin.

    ‘libertarian’ became a fashionable thign to say for a small group of tech elite tech get rich quick kids, when in reality, they want the teslas, fancy merch, and all the good expensive things in life a get rich quick lifestyle involves.

    liberty and getting rich quick are not really compatible in a real world lifestyle or view point. and yet, this is continuously celebrated together. but it is anti-thetical.

    the types of folks pumping financial innovation at the big banks, celebrating the r3 consortium are the likes of people formerly employed at goldman sachs and now at startups like circle.

    how can these seemingly controversial disparities fail to be addressed time and again. i think it is basically that people are talking their book, selling snake oil of liberty same as alex jones sells his literal snake oils such as ‘super male vitality’. but at least when these things are being sold you know theyre just health tonics not claiming to be getting your rich, and at best, simply doing no harm to your health.

    i wish at one point, you’d cover these ttopics in the interest of discussing a philosophy of liberty. to ignore them is funamentally inconsistent.

    you can start with this question, what does a liberty viewpoint bring to bear on the overall topic of finance and how finance can both imprison human beings, or on the other hand contribute to their liberty.

    i would venture to say , that the preservation of wealth and finding a means for storing value that has been created by human beings……is a good place to begin the discussion.

    Reply

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