Rethinking Bitcoin – s $Ten Billion Market Cap

Amid enlargening hype about blockchains and distributed ledgers, the value of global cryptocurrency markets has risen rapidly so far ter 2018.

Spil of mid-June, the value of all blockchain-based currencies ter circulation wasgoed $14.37bn, and the price of bitcoin wasgoed, spil it has bot historically, a leading driver of this growth. At June’s highs of $700, the price of bitcoin had risen almost $300 since the end of May.

Spil the value of bitcoin proceeds to surge, many have looked at bitcoin’s market capitalization spil an indication of bitcoin’s value. With a total value of all bitcoins te existence at $10bn, the bitcoin market is presently more valuable than one of the largest social media companies te the world, Twitter.

Some have argued, however, that it’s unclear exactly where exactly the bitcoin market cap stands now, asserting it’s unlikely to determine with any sense of accuracy the value of all usable or spendable bitcoins.

Due to factors – including the notion of “zombie” bitcoins and the number of bitcoins stored by long-term, buy-and-hold investors – thesis market observers believe it’s difficult to make summary statements about the vitality of the market or its current trajectory.

While this may be a minor thing, this difficulty ter profiling the size and character of the bitcoin market is telling of the challenges the digital currency has te defining itself to the broader public. Ter addition, it points to pitfalls bitcoin will likely have to clear ter its near-future.

More importantly, the discussion of how to capitalize a finite, virtual currency speaks to the debate of what the future of digital commerce may look like.

Defining capitalization

To understand the significance of a capitalization to a market, one vereiste understand what a market capitalization is and how it is calculated.

Market capitalization is defined traditionally spil the price vanaf share for the commodity at the time of the capitalization, multiplied by the current number of outstanding shares ter the market. For most publicly-traded companies and securities, the capitalization is an plain way to ascertain the health of the market ter comparison to where it wasgoed previously and comparative to other securities being traded.

The problem with the bitcoin market, however, lies te the definition of “outstanding shares.”

Most analysts use the traditional definition of “number of tradeable units that were active ter the last two weeks” to determine market cap. While this is a flawlessly acceptable for most securities, this definition has two unavoidable fuckholes when it comes to bitcoins.

Very first, if bitcoins are a digital currency, the outstanding shares definition fails to adequately account for dormant coins.

Te 2014, NVIDIA engineer John Ratcliff theorized that approximately 30% of the current bitcoin supply is made up of “zombie bitcoins” that have bot inactive for more than a year. This number includes bitcoins connected to inaccessible wallets, government-seized bitcoins, “burned” bitcoins and bitcoins abandoned during the early days of bitcoins – including Nakamoto’s mythical stash of overheen a million bitcoins.

Due to bitcoin’s security and lack of centralized authority, any attempt to access thesis lost coins – brief of brute-forcing their wallets’ passwords – is unlikely. Spil such, thesis coins exist, but they are effectively unusable by anyone except those ter possession of the related private keys.

Thesis bitcoins, combined with those that are intentionally dormant – spil either commercial reserves or spil individual savings – account for coins that were used ter good faith, but are presently not “active” te the market.

Today, intentionally or unintentionally dormant coins are not reflected te most calculations of the bitcoin market cap.

2nd, if bitcoins are a commodity, then the bitcoin market capitalization – spil it is calculated today – is a reflection of trade volume of freshly mined and short-term traded coins, and not long-term investments. Spil previously argued, this would exclude intentional dormancy, making the bitcoin market cap a reflection of the current fluidity of the market and not its overall worth.

Still, Stephen Holmes, CTO of the Digital Banking Laboratorium at IT consulting hard VirtusaPolaris, argues that using the market capitalization to estimate the bitcoin market’s worth is missing the point.

“Bitcoin is a store of wealth. The advantage is that it is a finite currency so it cannot be deflated because of the printing of extra bitcoins, unlike today’s plane currency,” said Holmes, adding:

“Scarcity is the real value of bitcoin. exchange rates will by definition fluctuate overheen time.”

Security concerns

One of the characteristics that directly affects the value and capitalization of cryptocurrencies is that they are scarce, meaning that they are goods that exist te a finite quality.

If one wasgoed to say that a cryptocurrency is a commodity te the traditional sense, one would expect to be able to trace a cryptocurrency’s units to an actual physical entity that would confirm the unit’s uniqueness and ownership. What prevents this from happening is the blockchain, an openly collective register that stores and verifies the transactions of every cryptocurrency unit. The blockchain makes the notion of simply copying a bitcoin meaningless.

This reinforces the notion of an electronically-assured digital good, but it also creates a situation that may not be friendly to newcomers.

For example, a novice user who has lost their wallet’s password or a casual user who has had their laptop stolen will also lose access to his or hier bitcoins. However there are storage solutions available, this feeds fears that investors who buy into the market could lose custody of funds, something they may not have with more traditional assets.

“It’s a double-edged sword,” said Chris McAlary, chief executive officer of Coin Cloud, a bitcoin trading and ATM company.

“People are drawn to bitcoin because it empowers them to take on the advantages that come with existing outside of the traditional banking system. With that come some risks which novice users may not be ready for. Successful bitcoin companies will build products that minimize that risk.”

Zombies and the future

The question of “zombie” bitcoins is also significant because of what it represents about this emerging technology. It is theoretically possible for digital goods, such spil downloadable movies, music and games, to be digitally protected using a blockchain.

Such a scheme could make media tearing and non-authorized sharing – such spil peer-to-peer downloading – pointless.

This, however, opens up the possibility that assets are lost. If a product is expected to be sold digitally, many would agree that there voorwaarde be a mechanism te place to facilitate recovery – something a blockchain te its present form cannot do.

“With any asset there is a risk of losing it. Bitcoin is no different,” said Holmes, adding:

“The only real difference is that with bitcoin you have to cautiously secure the bitcoins and that means putting them te a wallet and best practice is to hold them offline. Key management has bot an ongoing challenge ter the IT industry so it could be argued that this is one of the potential weaknesses of any cryptocurrency.”

Te considering the true value of the bitcoin market, one vereiste take earnestly the question of lost wealth and the validity of the efforts to recover it. Due to the fact that the market has not embraced wealth recovery spil a requirement, it may ultimately be unlikely to truly quantify the size of the market.

To some bitcoin enthusiasts, this is a ideally acceptable situation.

“A few years ago, I lost my key to my huis safe,” Holmes said. “After carrying the powerful safe to a number of locksmiths and getting nowhere I ultimately visited one and literally within two minutes he had opened the safe. Locksmiths and wallet crackers are actually a healthy development, providing that the cracking is done with consent.”

He added that thesis concerns, spil with bitcoin’s market cap question, are simply issues that will be solved overheen time, concluding:

“Spil it did at the beginning of the dot-com boom, the market will provide what it needs to sustain.”

The leader ter blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a rigorous set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests ter cryptocurrencies and blockchain startups.

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