Breaking down what Market Cap really means for Cryptocurrency (Beginner Edition)
I'm relatively new to cryptocurrency so I wanted to take some time to study and understand the ins and outs of investing and trading.
Whenever I see anyone discussing currency, the discussion always turns to market cap.
What does this mean and how does it relate to cryptocurrencies?
I'm going to use Bitcoin as an example as it's the most common. Bitcoin, unlike the stock market, can't be truly expressed in market cap. Bitcoin's market cap is really subjective because there are no shares. In fact market share was originally created to refer to stocks.
When market capitalization was originally created it referred to price per share x outstanding shares in the market. With Bitcoin however it can be difficult to define outstanding shares. Usually this refers to shares that are active within the last "2 weeks". This is where it proves difficult.
With Bitcoin there are coins that have become lost or dormant. These are referred to as "Zombie Bitcoins".
In 2014, NVIDIA engineer John Ratcliff theorized that approximately
30% of the current bitcoin supply is made up of "zombie bitcoins" that
have been 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 over a million
bitcoins.
http://www.coindesk.com/rethinking-bitcoin-market-cap/
Because of the encryption and security built into bitcoin and the lack of oversight authority, it's impossible to recover these without the original "passwords" or "keys". Rendering them completely useless or unrecoverable. There are also many coins that are being hoarded or purposefully kept dormant as a savings.
Most bitcoin market cap calculations today exclude dormant or lost coins. The current market cap really measures the fluidity of the bitcoin market and not the full number of coins in existence.
I believe the real value bitcoin comes from the fact that it is a finite number. More cannot be created after the last coin in mined which makes it scarce and more valuable as it rises in popularity. It will become harder and more valuable to even own 1/2 of a bitcoin, much less a half. This is something that can't be manipulated like standard fiat currency where the government can just print more money when needed.
Market cap, when referring to bitcoin, really refers to the current usuable, tradeable coins in circulation. It's skewed from what a real market cap would be where you would have all coins in existence accounted for.
Another term I hear quite frequently is Fiat Currency: This is legal tender that has been created and backed by a government.
I will keep trying to break things down and explain them in more simple terms as I learn and my knowledge increases in this field. If I've blatantly screwed something up or not explained something properly, making things more confusing, please don't hesitate to yell at me...I have thick skin.
I was able to pick a few points. Thanks!
Where did you find this definition of outstanding shares being those that are active within the past 2 weeks? I think that definition is wrong. Here is a definition from Investopedia:
"Outstanding shares refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. Outstanding shares are shown on a company’s balance sheet under the heading “Capital Stock.” The number of outstanding shares is used in calculating key metrics such as a company’s market capitalization, as well as its earnings per share (EPS) and cash flow per share (CFPS)."
Read more: Outstanding Shares http://www.investopedia.com/terms/o/outstandingshares.asp#ixzz4lz9SE3uT
I don't know of an instance where market cap is calculated by "Active shares".
Here is an piece I wrote on market capitalization recently:
https://steemit.com/billion/@doyoueatdolphins/what-does-the-usd100-billion-dollar-cryptocurrency-market-cap-mean
I will definiltey research this a bit more. I saw that in a few source articles when I was reading. I didn't really question it since the time frame didn't matter much to me. I will check our your article. Definitely could use all the information I can get. Thanks for the feedback.
Congratulations! This post has been upvoted from the communal account, @minnowsupport, by haushinka from the Minnow Support Project. It's a witness project run by aggroed, ausbitbank, teamsteem, theprophet0, and someguy123. The goal is to help Steemit grow by supporting Minnows and creating a social network. Please find us in the Peace, Abundance, and Liberty Network (PALnet) Discord Channel. It's a completely public and open space to all members of the Steemit community who voluntarily choose to be there.
If you like what we're doing please upvote this comment so we can continue to build the community account that's supporting all members.
Best regards and I would like you to follow me and I will follow you, helping me, giving an upvote
Congratulations @haushinka! You have completed some achievement on Steemit and have been rewarded with new badge(s) :
Click on any badge to view your own Board of Honor on SteemitBoard.
For more information about SteemitBoard, click here
If you no longer want to receive notifications, reply to this comment with the word
STOP