Marketcap Isn't Bulls\*t
Paul Sztorc
March 26, 2018
Is “market capitalization” (price per unit * units in existence) a poor indicator of a network’s value? Some say so.
Claimants include, surprisingly, Rick Falkvigne on the left and Jimmy Song on the right. Interestingly, it does not follow from the original (and best) Altcoins work, which does invoke the marketcap argument1.
My position is that the marketcap is not perfect – it is flawed. But marketcap is the optimal metric of network success. There isn’t a single better alternative. This includes combinations of other metrics, or combination of marketcap with non-mktcp metrics.
First, let me point out that the terms “marketcap” and “current price” are interchangable. This is because the units of money are fractional, so you only care about what percentage of the current influence you have. Thus, marketcap numbers should NOT include coins that have not yet been mined, or have been irrecoverably lost, or coins which are “locked up” for any other reason. Such knowledge may be difficult to obtain, but a best guess is sufficient – exchange rates respond not only to changes in supply, but to expected changes in future supply (as well as current/expected future changes in demand).
So the people who argue that “marketcap” is an inferior metric (to…their own expertise?, …to nothing?) are in fact rejecting the price system and pledging their support for a FOREX system based on international central planning. ( Or else (?) they are arguing that knowledge about “a network’s value” does not exist and could never be created under any circumstances. )
Some people observe that assets will occasionally have “wrong” prices. But this is an unavoidable and desirable aspect of a market system that is constantly aggregating everyone’s [changing] information over time. It is also ubiquitous across all markets (not just crypto): to paraphrase Scott Sumner, “Yesterday’s price was always wrong. Today’s price is always right.”
E Yudkowsky rightly observes that this is “something of a pons asinorum”. For whatever reason, some people just don’t get it and will never get it. To everyone else, it is just obvious.
This anti-inductiveness is the big reason why marketcap is inescapably optimal – it contains assessments of other factors. So if “txn volumes” or “merchant adoption” increase, marketcap is likely to increase. …unless everyone realizes that those numbers were fake/manipulated, in which case marketcap will return to its previous value.
Anything anyone learns, will be captured in the market price. ( This is why it is good that prices keep changing – because we keep learning! )
You see, there will not ever be any “right” price about anything. Such a “justified right price” would imply that we have perfect knowledge about everything, which is impossible. So the price will always be wrong, and we will always need to update it. Thus, the crucial question is: “Which metric updates [toward truth] the fastest?” and the answer is: the marketcap.
Specifically, “Bitcoin has a market larger by a wide margin than all the markets of all the altcoins put together, and this makes it vastly more useful as a currency”. ↩