The multiplujillions of cryptocurrency

The wealth of Scrooge McDuck, the Scottish tycoon who worked his way up the financial ladder, was, according to some research, one multiplujillion, nine obsquatumatillion, six hundred twenty-three dollars and sixty-two cents. In the recent years, the cryptocurrency market is quickly reaching similar levels. Specifically, according to CoinMarketCap it was 217 Billion USD at the beginning of 2019. A closer look into those numbers though show that this wealth is probably even more imaginary than Duckburg’s most famous vault’s contents.

CoinMarketCap is, by far, the biggest cryptocurrency market source. The core metric it provides is the price of each cryptocurrency, which is computed as the average of the market price on several exchanges all over the world. The other core metric is market cap, which reflects the value of a cryptocurrency’s entire market. By mid-January 2020, the price of Bitcoin is $8164, while its market cap is $148 Billion, which is the price of a single Bitcoin multiplied by the number of bitcoins in existence; similarly, the market cap of the entire crypto-market is $217 Billion. However, there is a small detail: CoinMarketCap also considers crypto-crypto exchange markets. Imagine a market of 2 beans, a fish, and $10. Somebody buys the fish with $5 and a bean with the other $5 and next they exchange the fish for the other bean. According to CoinMarketCap, in this world a fish and a bean each cost $5, but the market cap of the fish market is $5 and of the bean market $10; notice that the entire market cap is $15, although only $10 really exist.

November 2019. CoinmarketCap introduces a new metric, “liquidity”. Market liquidity describes how many products of type A “contest” the products of type B on an exchange at any moment (equiv. the depth of the order book). For instance, in the above bean/fish market, if somebody offered $20 and a bean for the fish, CoinMarketCap would assert an entire liquidity of $25 ($20 for the fish/USD market and $5 for the fish/bean market). By mid-January 2020, fiat liquidity, which is CoinMarketCap’s liquidity only regarding fiat/crypto markets, is $74 Million. Now let’s assume that CoinMarketCap only registers ⅕ of the actual liquidity, so in total $375 Million of fiat currency supports the trading market each day.

Naturally trading is not the only crypto use case, as many vendors accept them as alternate means of payment. For example, BitPay, one of the biggest crypto payment providers (meaning the middlemen who run everything on behalf of vendors), “has processed more than $2.8 Billion since 2011”. Assuming (optimistically) that $2 Billion of these transactions took place in 2019, we have $5 Million per day. Additionally, assuming that BitPay controls 1/50 of the market, we end up with $250 Million per day in the entire payments market. On the above we should add the extra (important) assumption that vendors and companies like BitPay don’t resell their coins on the trading market, which is covered above, but rather hodl them.

Finally, there also exists the dark market, where smugglers use cryptos to buy guns, drugs, or hired killers. Indeed, according to a research of Chainalysis, the biggest usage and transaction analytics research company, 2019 saw an increase in the usage of cryptos in the dark market. Specifically, during the first half of 2019, $500 Million worth of cryptos were used on the dark market. Even if these estimates are very conservative and correspond to 1/50 of the actual numbers, the dark market corresponds to $50 Billion for the entire 2019, meaning $136 Million of cryptos per day.

Time to collect: $375 Million on the trading market, $250 Million on day-to-day transactions, and $136 Million on the dark market, which sum up to $761 Million. In other words, $761 Million fiat (USD, EUR, GBP etc) support a market of $217 Billion in cryptocurrency. Where are the remaining $216.239 Million? This will be your homework. If you believe that they correspond to the future potential of cryptocurrencies in the global financial system, then no need to worry. If, on the other hand, you think that these prices and market caps are illusional, then we are in front of a major bubble.

Closing, let’s look at a future where the bubble bursts. Imagine that, for some reason (e.g. a major exchange collapses or the US authorities sue a major player), almost everybody runs towards the exit. The crisis turns into panic, as more and more investors try to sell. Now imagine a game of musical chairs; each chair corresponds to $1 and each player corresponds to the cryptos that are valued as $1 in today’s prices. Even if we consider the product markets (clear and dark) as frictionless and that demand for cryptos will not recede in such a period of crisis (which history has disproved time and again), the ratio of chairs-to-players is 1/285. Therefore, on that dark day, there will be only $1 to buy cryptos which today are worth $285. Enjoy.

(A Spanish version of this article was published in Diario.)