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Bitcoin’s dilution-adjusted price

Bitcoin dilution adjusted price

This chart is the Bitcoin historically adjusted price taking into account lost coins and inflation effects of new coins mined into existence, if you were to treat bitcoin like a company. (Yes we are very close to an all time high.)

I thought it would be fun to plot this after reading Vinny Lingham’s post on deconstructing Bitcoin’s marketcap. Lingham reasons that since more coins are mined into existence daily, this has the effect of a continual stock split. All stock charts we see on Wall Street correct for this dilution effect so we can compare today’s price with past prices never mind the actual number of shares in existence. In this plot, we are assuming approximately 2.5m coins have been lost.

[Live chart]

Okay, so I plotted this chart, but I don’t think this is the right way to look at historical price…

In stocks this adjusted price graph would track your portfolio value accounting for extra shares issued to you, but in Bitcoin those extra issued coins go to the miners. Rather that modelling around stocks in a company, I see Bitcoin as a currency, so the FOREX rate to USD remains true at any point on the chart, never mind the M2 money supplies of each respective currency at that point in time. Perhaps for crypto-currency, it would be more correct to say M2 money supply rather than the word “marketcap”.

Maybe others have thoughts on this?

I have a lot of brain-farts on crypto-currency. For more farting, follow me on Twitter @dangermouse117

BTC Tips: 1KrYzd8y6gnJekibZpb4ixif4nJYbaaZct

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5 Comments

  1. Vinny Vinny

    Great, now do the real rate if inflation calculation relative to nominal and plot that against the chart – that should make a more sense.

    • Vinny, you mean USD inflation? This graph includes BTC inflation.

      • Vinny Vinny

        You’re using the inflation adjusted price. I mean the rate of inflation (5%, 7% etc).

  2. Jacob Eliosoff Jacob Eliosoff

    Great stuff! Agreed with your insight about new shares going to miners rather than holders.

    I’d argue that for both companies and Bitcoin (and other assets), we need to be careful to distinguish different charts: market cap, traded price, and investor returns. Eg:

    – A stock split reduces price, but leaves market cap and investor returns unchanged
    – New share issuance (diluting investors, eg a pre-IPO round of funding) increases market cap, but not price or investor returns
    – Good news about a company increases all three in sync

    So as you say, bitcoin mining is more comparable to diluting holders via share issuance than to a stock split. The different charts serve different purposes: obviously the investor returns chart, aka the price chart we all know and love, matters for rating BTC as an investment. But mining/issuance means the market cap chart is more meaningful for tracking total interest in bitcoin – just as it is for a company. (The much greater usefulness of market cap than price as a measure of total interest was starkly illustrated by Zcash’s first week.)

    (There’s one more chart I’ve argued before would be useful: *total net $ invested* in a market. Eg, if 100 XCoins are mined/bought for $1, and then later 1 more is mined for $1,000, the market cap is now $101,000, but arguably only $1,100 has actually been invested in the XCoin market. But this would take a long blog post of its own…)

    • On that last point (total net invested), outside of the first miner who sells onto the market. The total net invested of each trade is exactly zero – for each sell is a matching buy. So not sure how we’d actually deliver a useful graph.

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