As the bitcoin economy evolves — and eventually, in a hazy future, stabilizes — I’ve been thinking about useful metrics that can capture this evolution. In particular, I’m interested in some rough and ready indication of what sectors of the economy are capturing the most value. This is critical for investing, as opposed to day trading.
One metric that sticks in my mind, I’m calling Bitcoin Money Supply Days. This is particularly useful for gaining an intuition on valuing enterprises that capture a macroscopic percentage of the overall bitcoin money supply.
For an example from the conventional economy consider Apple, whose market cap at 4.5E11 USD (half a trillion dollars), captures a macroscopic 4.5% percent of US M2 (1 E13 USD, or 10 trillion dollars). Here, I’m using M2 as a proxy for USD money supply comparable to the supply of all bitcoin. M2 isn’t a perfect measure, but it is widely known and useful for that reason. Or, since AAPL is a global company, perhaps we should use World M2 of 5.5E13 or 55 trillion USD, as estimated at http://money.howstuffworks.com/how-much-money-is-in-the-world1.htm. In that case AAPL captures a mere 0.8% of “Global Currency Money Supply.”
The question for an investor in bitcoin valued stocks is, can MtGox, Satoshi Dice, AsicMiner, or any of the other currently high valued bitcoin enterprises — Silk road for that matter — hope to command a share of overall bitcoin money supply, analogous to AAPL’s share of M2?
I’m not going to answer that question today, though I will circle back in future posts.
The idea today is merely to get an intuition for this metric.
For a given sector of the economy, or even a given company, Bitcoin Money Supply Days measures how many days pass before the entire money supply of bitcoin flows through some “bitcoin capturing” gate. It depends how you measure flow, of course, and it makes sense to consider several measures. Dividends paid to owners is an obvious one, and quite transparent to see. Total transaction volume is another. Total revenue, ignoring expenses, is another contender.
Generally lower numbers are better, because less time means faster flow.
While measuring flow (or even choosing what to measure) is rather difficult, measuring money supply is easy. It will only ever reach 2.1E7 (21 million) bitcoin, and the current amount is precisely learnable with a one second query to the bitcoin network — it’s currently hovering around at a little over half the total, inflating for now at about 15% per year.
For a concrete example, consider Bitcoin Money Supply Days for MtGox transaction volume, using http://bitcoincharts.com/markets/mtgoxUSD.html for source info.
Daily Gox Volume is about 2E4 bitcoin, current bitcoin money supply is 1.2E7.
Ignoring inflation, not to mention concerns about solvency, about 600 days pass for 1 unit of total Bitcoin Money Supply to flow through MtGox, on our napkin calculation.
If we consider MtGox revenue rather than all transaction flows, we can use the fact that MtGox charges 0.2% per trade and multiply by 500, and get 300,000 days, or 821 years, for 1 current Bitcoin Money Supply of revenue, to flow through MtGox. Which gives us yearly revenue of
1/821 Bitcoin Money Supply
== 1.2E7 bitcoin / 821
== 1.5E4 bitcoin
== 1.5E7 USD at 100 USD/btc
== 10.5 million USD in annual revenue.
Although I hope the BTC/USD ratio has gone up in 800 years!
Kidding aside, the point is that we are doing napkin arithmetic: situating large trends in a large economy where exact numbers experience a lot of daily volatility, and precision doesn’t buy us much. Still, napkins can be useful.
As a final muse, what happens when we consider AAPL in this light, with fuzzy world M2 as a proxy for bitcoin money supply and dividends (a highly visible number from AAPL financial statements) as the measure for flow?
World M2 / AAPL daily dividends
== 5.5E13 USD / ( total annual dividend / 365 )
== 5.5E13 USD / ( 3.6E10 USD / 365)
== 560,000 days
Same order of magnitude as MtGox revenue days calculated above, which confirms the intuition that MtGox has a similarly important place in the bitcoin economy as AAPL has in the global economy.
Food for thought at any rate.
My plan is to return to this metric in future essays for comparing various sectors of the bitcoin economy, and extrapolating to a future world where’s bitcoin’s share of “Global M2” has stabilized and there is more clarity on who the dominant players are. Bitcoin in 2023, in other words.