This story is all over the papers, that as Bitcoin has gone over $50,000 therefore the market capitalisation has passed through $1 trillion. At which point we need to proffer the injunction – don’t be silly.
The market cap is higher than it was, sure, but it’s still not $1 trillion:
Bitcoin hit a new high on Friday, giving it a market value of more than $1tn for the first time.
Bitcoin rose 6.4% during trading on Friday to reach an all-time high above $55,000, and was on track for a weekly gain of about 14%.
The surge took its market capitalisation – the value of all bitcoin in circulation – to more than $1tn, according to the data website CoinMarketCap.
As to why think through how the market cap is calculated. We know the total number of Bitcoin that will ever be produced. We also know how many have been produced so far. So, multiply that number by the price and we get the market cap, no?
No, we don’t. Because we know that some number of coins are dead and gone. We know this because we get repeated stories about folks with one attempt left on their password, or those offering local authorities a reward if they can scour the town dump for that old hard drive worth $200 million.
Bitcoin itself, as a currency, is inherently deflationary. An expanding economy requires an expanding money supply in the same way that a restaurant doubling the number of lunches it serves requiring more plates and cutlery. Bitcoin, once the issuance limit is reached, doesn’t do this so it is, indeed deflationary.
But it’s worse than that in that those hard drives do go missing, passwords do get forgotten. Therefore the supply of Bitcoin continually declines as against that number that we think are in issuance. Think of paper money – the central banks constantly replace torn, worn out notes. No one does that, no one can do that, with Bitcoin. Bitcoin locks us into a constantly shrinking money supply. This is not a good macroeconomic idea.
It also means that the market capitalisation is not the number of coins ever issued times the price. Because some number – one guess has it at about 20% – have been destroyed to all intents and purposes.