Institutional Trader: What the crypto experts get wrong about crypto
May 6, 2021
In this episode, we discuss why most people are getting crypto wrong.
Hey, are you into crypto at all? Do you own any Bitcoin, Ethereum, maybe even some Dogecoin? So this episode is gonna talk a little bit about crypto and I'm not going to try to sell you crypto or anything like that. The aim of this episode is to help you get a better understanding of crypto and by the end of this episode, you will actually have a much better understanding of crypto than I would say 95% of people out there because most of the people are getting it wrong and here's one way that they're getting it wrong.
This idea of a market cap for crypto. People will say, even CNBC and even like top financial traders will point to this market cap. But it's a very stupid thing to point out because first, a market cap is only for publicly traded companies that are creating revenue. You can't assign a market cap for a commodity. That makes absolutely no sense. So when you have even these financial experts or crypto experts talking about a market cap, what the hell are you talking about? The way that crypto-assets are, and we'll talk in particular about Bitcoin, because there's so many and the economics of each one are different.
But Bitcoin, the value proposition for Bitcoin is that it is a store of value. It behaves like digital gold. Digital gold is also a store of value. And the reason why Bitcoin works is the same reason why gold works. It needs a consensus among people to say yes, this has value. And the consensus that that belief that gold has value or Bitcoin has value is what actually gives Bitcoin value.
So the mistake that's being made is whenever people are comparing publicly traded companies and the market caps with those companies to crypto-assets, this makes no sense. So I saw a post the other day where someone mentioned that Dogecoin had a larger market cap than the top six airlines combined. And while that number might be true, the comparison is just not a smart comparison because crypto-assets, they don't have market caps. If you look up the definition for a market cap, it does not apply to commodities, gold does not have a market cap and that market cap idea does not work for crypto.
So there is no crypto or if there is no market cap for crypto, then how do we compare crypto? So the way to look at crypto is crypto and particularly Bitcoin. It's a commodity. And if you look at the principles of commodity, those can be applied much better to crypto. Again, the best way to think about it is it's like digital gold, but crypto is a little bit different from gold and I'll explain how in a little, in a little minute, and I'm telling you guys by the end of this episode, like you're probably going to know so much more about crypto, just based off of these short little things um to orient your understanding around how the crypto commodity markets work.
All right, so how does Bitcoin differ from gold? We already understand that Bitcoin and other crypto-assets can't be compared to the market capitalizations of revenue-creating companies, value-creating companies. Um, so we know that Bitcoin is a commodity, so how does Bitcoin differ from gold?
Okay, besides the principles that people tell, you know, in terms of Bitcoin being easy to transact in, It's you can divide it down to the 8th decimal place, etc. The thing about gold is gold has a supply and demand curve and based on the supply-demand curve, one of the properties of commodities is that commodities are mean-reverting, and what this means is the price for a commodity will go back to whatever the general consensus price for this commodity is.
So you might say, "Hey Robin, if commodities are mean-reverting then why is gold? Why is the price of gold going up? Gold is a commodity? How come it's not reverting to the mean?" So gold is reverting back to the mean. It really depends on the supply and demand curve. When there is a high amount of supply, the demand will go down when there's a low amount of supply, the demand will go up and this keeps it reverting back to the mean. But what's happening with gold is that the mean is steadily increasing, but it still has this property where it reverts back to the mean. With gold out with, I'm sorry Bitcoin, however, it's a little different because the supply curve for Bitcoin is static. What this means is that no one can change how Bitcoin is mined. The number of Bitcoins that are being mined every single year is determined by math.
So what this means is that the supply curve is static, it's not going to move and if the supply curve is static, then you lose this principle of mean reversion. So crypto-assets is a brand new thing. We're all still trying to wrap our heads around it, but what it is not is it is not a publicly-traded company. It is a commodity, it does not have a market cap because commodities don't have market caps. And one thing that we are understanding is that there's some principles of commodities that don't reflect in Bitcoin. Um and this is purely based on just how the code for Bitcoin is written. The supply curve is static. We know exactly how many Bitcoins are going to be mined each year. So based on that static supply curve, it's really difficult to go back to the mean because you can't oversupply Bitcoin, you can't put more Bitcoin on them or you can't mind more Bitcoin than what's allowable like you can with gold.
So that's how crypto differs from gold and how crypto differs from market caps of publicly traded companies. So next time you hear someone say, "oh Dogecoin is a better buy or Bitcoin is a better because the market cap is like bigger than Tesla or maybe smaller than Tesla et cetera. Those are like two noncomparable things. You can put that person in this place and show them how much knowledge you have about crypto. I hope this helps happy building, happy investing. This is Robin Copernicus. Boom. Bam, I'm out.
Continue your journey with me on my other channels:
This idea of a market cap for crypto. People will say, even CNBC and even like top financial traders will point to this market cap. But it's a very stupid thing to point out because first, a market cap is only for publicly traded companies that are creating revenue. You can't assign a market cap for a commodity. That makes absolutely no sense. So when you have even these financial experts or crypto experts talking about a market cap, what the hell are you talking about? The way that crypto-assets are, and we'll talk in particular about Bitcoin, because there's so many and the economics of each one are different.
But Bitcoin, the value proposition for Bitcoin is that it is a store of value. It behaves like digital gold. Digital gold is also a store of value. And the reason why Bitcoin works is the same reason why gold works. It needs a consensus among people to say yes, this has value. And the consensus that that belief that gold has value or Bitcoin has value is what actually gives Bitcoin value.
So the mistake that's being made is whenever people are comparing publicly traded companies and the market caps with those companies to crypto-assets, this makes no sense. So I saw a post the other day where someone mentioned that Dogecoin had a larger market cap than the top six airlines combined. And while that number might be true, the comparison is just not a smart comparison because crypto-assets, they don't have market caps. If you look up the definition for a market cap, it does not apply to commodities, gold does not have a market cap and that market cap idea does not work for crypto.
So there is no crypto or if there is no market cap for crypto, then how do we compare crypto? So the way to look at crypto is crypto and particularly Bitcoin. It's a commodity. And if you look at the principles of commodity, those can be applied much better to crypto. Again, the best way to think about it is it's like digital gold, but crypto is a little bit different from gold and I'll explain how in a little, in a little minute, and I'm telling you guys by the end of this episode, like you're probably going to know so much more about crypto, just based off of these short little things um to orient your understanding around how the crypto commodity markets work.
All right, so how does Bitcoin differ from gold? We already understand that Bitcoin and other crypto-assets can't be compared to the market capitalizations of revenue-creating companies, value-creating companies. Um, so we know that Bitcoin is a commodity, so how does Bitcoin differ from gold?
Okay, besides the principles that people tell, you know, in terms of Bitcoin being easy to transact in, It's you can divide it down to the 8th decimal place, etc. The thing about gold is gold has a supply and demand curve and based on the supply-demand curve, one of the properties of commodities is that commodities are mean-reverting, and what this means is the price for a commodity will go back to whatever the general consensus price for this commodity is.
So you might say, "Hey Robin, if commodities are mean-reverting then why is gold? Why is the price of gold going up? Gold is a commodity? How come it's not reverting to the mean?" So gold is reverting back to the mean. It really depends on the supply and demand curve. When there is a high amount of supply, the demand will go down when there's a low amount of supply, the demand will go up and this keeps it reverting back to the mean. But what's happening with gold is that the mean is steadily increasing, but it still has this property where it reverts back to the mean. With gold out with, I'm sorry Bitcoin, however, it's a little different because the supply curve for Bitcoin is static. What this means is that no one can change how Bitcoin is mined. The number of Bitcoins that are being mined every single year is determined by math.
So what this means is that the supply curve is static, it's not going to move and if the supply curve is static, then you lose this principle of mean reversion. So crypto-assets is a brand new thing. We're all still trying to wrap our heads around it, but what it is not is it is not a publicly-traded company. It is a commodity, it does not have a market cap because commodities don't have market caps. And one thing that we are understanding is that there's some principles of commodities that don't reflect in Bitcoin. Um and this is purely based on just how the code for Bitcoin is written. The supply curve is static. We know exactly how many Bitcoins are going to be mined each year. So based on that static supply curve, it's really difficult to go back to the mean because you can't oversupply Bitcoin, you can't put more Bitcoin on them or you can't mind more Bitcoin than what's allowable like you can with gold.
So that's how crypto differs from gold and how crypto differs from market caps of publicly traded companies. So next time you hear someone say, "oh Dogecoin is a better buy or Bitcoin is a better because the market cap is like bigger than Tesla or maybe smaller than Tesla et cetera. Those are like two noncomparable things. You can put that person in this place and show them how much knowledge you have about crypto. I hope this helps happy building, happy investing. This is Robin Copernicus. Boom. Bam, I'm out.
Continue your journey with me on my other channels:
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