Cryptocurrency’s Calculation Problem: Why Most Investors Are Trading Incorrectly

   

   Cryptofam, we have a problem—one that has gone on far too long. A problem that is arguably responsible for most of the dumping in the alt coin market in the past and as I’m writing this post. It is a problem of perception, and one that exchanges are partly responsible for perpetuating. The problem to which I am referring is the USD values of alt coins and how they are being calculated. This is something I’ve attempted to bring attention to for months now only to be to be completely ignored. Well I am not wrong. This problem is blatantly obvious, and all you have to do to understand it is change the way you perceive an alt coin’s value. Also, you must understand “how” the dollar value of an alt coin is being calculated and how this value is directly dependent on the value of #Bitcoin despite any additional fiat or alt coin pairings.
 

The History

   Let’s take a look at the history of alt coin valuation. Though it was not the very first, the earliest and most recognizable alt coin is Litecoin. When it was released it was valued off of Bitcoin, and the same is true for all alt coins in existence. Before fiat pairings were a thing, Bitcoin served as the on ramp for fiat into the cryptocurrency market. No alt coins were traded using fiat—this has been a recent development. When fiat pairings were introduced, the calculation was based on an alt coin’s satoshi valuation—there is no independent fiat value. For this to have been the case, all alt coins would’ve had to been initially valued in fiat currency like Bitcoin. This is why when Bitcoin drops, the alt coin market bleeds in fiat value. It is a calculation issue, and no, alternative pairings will not correct this problem. I will explain why further into the article.
 

Satoshi Valuation

   What is a Satoshi? One Satoshi equals 0.00000001 BTC, or one hundredth million of a Bitcoin. Now if you go to the BTC pairing for the imaginary coin I’ve used in previous posts, GunnaMewnCoin (MEWN), and see a satoshi value of 0.01 BTC, you should read it as:
 

1 MEWN is equal to 1% of 1 BTC
 

Why is it so important for you to perceive it this way? Well, this percentage ties MEWN’s fiat value directly to BTC’s fiat value. The valuation should not be read as MEWN is worth X and X is 1% of a BTC. That is backwards. For example, to keep the numbers simple, let’s say:
 

1 BTC = $10,000 

What you don’t do:

1 MEWN = $100

$100 is 1% of 1 BTC. (this is backwards)
 

 What you should do:
 

1 MEWN = 1% of 1 BTC
 1 BTC = $10,000 so 1 MEWN = $100
 

With this in mind, what happens to the value of MEWN if BTC suddenly drops 50%?
 

1 BTC = $5,000 | MEWN 0.01 x 5000 = $50
 

MEWN’s dollar value drops 50% UNLESS it becomes worth more of a percentage of a BTC.
 

1 BTC = $5,000 | MEWN 0.02 x 5000 = $100

   Did MEWN actually lose 50% of it’s “value”? No, it did not. As long as the satoshi value does not change, the value of the alt coin has not changed. And if BTC suddenly drops 50%, and MEWN’s dollar value does not drop as well, if you checked the BTC pair for MEWN, you’d see a massive 200% gain leaving MEWN at 0.02 BTC that offsets BTC’s 50% loss. This is so ridiculously easy to understand, but the majority of people trading cryptocurrencies do NOT know this. Not only does this reality cause massive alt coin market sell offs, but this calculation problem leaves the entire cryptocurrency market vulnerable—more on this later.
 

   Now, one of the most common “counters” to what I am saying is always about alternative coin pairings. Well this is just ridiculous. Watch:
 

1 BTC = $10,000 1 ETH = 0.1 BTC ($1000) 

ETH/MEWN PAIR PRICE = 0.1 ETH ($100)
  

The calculation flow goes like this:
 

MEWN > ETH > BTC > USD
 

As a result, if BTC drops in price, the ETH/MEWN market crashes as well.  

   “But Taint, ETH has a fiat pairing.” IT DOESN’T MATTER. The fiat value people are paying is being determined by the value in satoshis. If this were not the case, then when BTC crashes, all coins with fiat pairings would not drop in dollar value at all. This is not the case. Now, like I said above, the coin with a fiat pairing could hold it’s value or even gain when BTC crashes, but that would require an actual valuation increase.   
 
A Percentage of A Percentage
 

If while reading this section you get confused, simply skip to the Bitcoin Vs Other Markets section.
 

   We’ve established that satoshi value is just a percentage of a Bitcoin. Now we must look at the market as a whole. The entire Bitcoin market is viewed as a “percentage” of the total cryptocurrency market. For the sake of simplicity, let’s say that the Bitcoin market is 50% of the total cryptocurrencty market and there are a total of 16,926,812 BTC in circulation. At $10,000 per BTC, that puts the total market value at $169,268,120,000. No you do not calculate it the opposite direction unless you’re just reversing the formula to find a hypothetical price—market cap is the value of one BTC x the total circulating supply. With this in mind, it becomes easier to view 1 BTC as a percentage of a percentage of the total cryptocurrency market’s value. 1 BTC is 1/10000 of 50% of the total market value which would be $338,536,240,000. That would make a satoshi a percentage of a percentage of a percentage of the total market value since it is a percentage of a Bitcoin, yes? Well here comes the most shocking thing about all of this. If all fiat valuation aside from BTC is dependent upon BTC’s price, then the ENTIRE cryptocurrency market’s fiat valuation is directly tied to BTC. In a way, BTC is technically always 100% market share. How? Well if the dollar value of all alt coins is dependent on the price of BTC, then the total dollar value of the entire alt coin market is dependent on the dollar value of BTC. It doesn’t matter what percentage of the market BTC is at any given time. You can prove this by looking at the total market cap decline when Bitcoin fell from $20k down to $6k. The total market cap decreased by 60%+ even though Bitcoin was at its lowest percentage of market share. If you exclude Bitcoin from the total market cap, you still get the same drop in the dollar value of the alt market. Yes, there were sell-offs, but many coins recovered. Look at the difference between NEOBTC and NEOUSD charts for example. The dollar value chart is almost identical to Bitcoin’s, but the satoshi chart is not. NEO grew during this time, but this wasn’t reflected in it’s dollar value nearly as much as it should have been. NEO shouldn’t have seen a dollar value change just because Bitcoin tanked.   

Let’s look at some scenarios:
 

   Let’s say that the total market cap is $500 billion. Bitcoin is at 30% market share. That puts Bitcoin’s market value at $150 billion. We reverse the formula to find they hypothetical price: 150,000,000,000 / 16,926,812 = $8,861.68 per BTC. That leaves the alt market’s value at $350 billion. Now for the hard part I have a lot of trouble explaining to people. If all of the alt market’s fiat value is being calculated using BTC’s dollar value as a unit of conversion, then wouldn’t the entire total market cap belong to Bitcoin, and all alt coins are just percentages of a percentage of a percentage of Bitcoin’s market value that have just been given a different name? I know it is confusing, but let me just use a simple example:
 

Let’s say the entire market is made up of 4 total coins: Bitcoin(30%), Ethereum(25%), Litecoin(25%), and MEWN(10%).   

That would be: 1 ETH = $1271, 1 LTC = $2,232, and 1 MEWN = $100 if the circulating supply of MEWN is 150 million.   

Bitcoin pairing values would be: 1 ETH = 0.143 BTC, 1 LTC = 0.252 BTC, and 1 MEWN = 0.0112 BTC.   

   If Bitcoin suddenly lost 50% of its dollar value and none of these four gained in satoshi value, the total market value would drop 50% as well even though Bitcoin only has 30% market share. We made a huge mistake in the beginning by not pricing alt coins in fiat first. In the above scenario, you might as well say that BTC’s dollar value is $29.5 million (500 billion / circulating supply), and every alt coin market is just a chunk of Bitcoin’s actual value that has been subtracted from that actual value and given another name and percentage of market value. But at the end of the day, Bitcoin’s value determines all other values. And Tether causes its own problems which I plan to discuss in another article. 

 I won’t get into the fact that even if the market cap is so many hundreds of billions of dollars in value that there isn’t actually that much money in cryptocurrencies. For more on this, you can read [here](https://www.zerohedge.com/news/2017-12-02/jpmorgan-has-some-bad-news-bitcoin-bears), and learn that it only took $6 billion to give us a $330 billion total market cap. Also, it only takes a few million dollars to move the price of BTC $1000 up or down making market manipulation quite easy.   
 

Cryptocurrencies vs Other Markets

  If you’re still with me, I would like to try and use comparisons to make this easier to understand. Let’s use gold as our example. How is gold priced? Well it is priced using a static unit of measure, weight—more specifically ounces. An ounce is an internationally agreed upon metric. It is static. One ounce today will be one ounce tomorrow. One ounce will always be 1/16th of a pound, and so on. At the time of writing, gold is $1313 per ounce. Now that value can fluctuate via market forces, but the unit of measure, ounces, is not susceptible to these forces. No amount of market activity can change what an ounce is. You following me? We do not have this in digital currencies. What we are using in the place of ounces when valuing alt coins is Bitcoin, a dynamic and highly volatile unit of measurement that unlike fiat currency, has no centralized power structure to try to keep it somewhat static. We are then trying to convert the value of alt coins to a somewhat static unit, fiat currency, by measuring them with this highly dynamic unit of measurement. That creates a total clusterfuck in terms of finding the true value. If Bitcoin drops 50%, is MEWN now worth half of what it was the day before even though it has nothing to do with Bitcoin? Well no. It’s value shouldn’t be impacted by the drop in price of a completely separate asset, but it is.
 

   Why does this happen? Well, imagine if “ounces” were dynamic units of measurement rather than static. Imagine what an ounce is could change at any time. Imagine you have a 1 ounce bar gold. Today it’s worth $1313. You wake up tomorrow and what an ounce is has changed. Now what was an ounce yesterday is now only half an ounce today. Your 1 ounce gold bar drops 50% in value not because the market determined that it should, but because the way it is being measured has changed. This would make determining the actual value of anything impossible. Everything in the world that is priced based on weight would be so volatile that you’d never be able to keep track of it. That is what is happening in the cryptocurrency market. As long as Bitcoin serves as the means through which we determine fiat value, we will never have stable prices. We will keep having massive alt market sell offs the second BTC drops in price.  
 

  I am in no way smart enough to solve such a complex problem, but the only thing I can think of is that we must come up with a static unit of measurement for cryptocurrencies. It is the only way other than BTC’s price magically becoming as stable as fiat without centralized control. And none of us want centralization in cryptocurrencies. We need a digital equivalent of weight—something static or only slightly dynamic.   

Taint, Why Does Any Of This Matter?

   Let’s say my statements regarding Bitcoin in a way being 100% of the total market cap are wrong, even though I don’t think so. Even if I am wrong about that, it doesn’t matter. This calculation problem across exchanges is the main reason we see MASSIVE sell offs in the alt market when Bitcoin drops. Say Bitcoin drops 10%. All other coins also drop 10% in dollar value unless they gain relative to Bitcoin. Retail traders only look at that dollar value drop. They freak and start dumping alts without looking at the BTC pair charts. This turns the dollar value drop of an alt coin from a 10% loss to even more. If an alt also loses 10% in sats, you’ve just turned what was a 10% dollar value loss into a 20% dollar value loss.

  On the flip side, if you’re wanting to double your profits buying a Bitcoin dip, you buy a strong alt that suffered an uneeded sell off, and as Bitcoin goes up, you’ll make those gains without being invested in Bitcoin. Furthermore, when people see that alt dollar value going back up, they start buying back in and drive the satoshi value of the alt back up. If you were buying MEWN after the 10% drop mentioned above, your ROI would be 10% off of a Bitcoin recovery, and another 10% when MEWN recovered in sats. This is a tactic I use. If Bitcoin starts to tank, I immediately convert my alts to Bitcoin. I protect myself from a stupid sell-off in the alt-market. Then the alt sell off hits and I get to buy discounted alt coins. If I held my alts, I would suffer more of a loss than just holding Bitcoin. 

    Taking it one step further, you can sell to Bitcoin and tether to the dollar. Then when you buy back, you’ve taken even less of a loss. But YOU HAVE to buy Bitcoin back cheaper to get the full benefit. But even if you miss the Bitcoin run up, you can still buy back into alts before their sat value returns to normal. Its a neat little trick I use even though it SHOULD NOT exist, but it’s basically hedging. This is creating volatility for no reason. The first thing I tell anyone who is asking me for tips in the alt market is to look at sat value ONLY. It is all that matters.   
 

 A Significant Vulnerability

   The last thing I would like to discuss the fact that this problem creates a huge vulnerability in the cryptocurrency market—one that is already being exploited. By attacking the price of Bitcoin, you can indirectly attack the entire cryptocurrency market. If you drive the price of Bitcoin down, you can trigger sell offs across the entire market. This creates an enormous amount of volatility and scares people away. Investors end up losing money within the first few days of buying in sometimes. Institutions are using their enormous capital paired with the futures market to literally scare money out of cryptocurrencies. This is something no one seems to see. There’s talk about manipulation by institutions, but no one is putting together the entire picture. If we do not find a way to fix this calculation problem, in the next few years, institutions will own enough Bitcoin to completely kill the market. Awareness can help prevent the sell offs in the alt market. If we can stop the selling in alts, we can reduce the volatility a great deal. And then we have to figure out what to do about this dollar value problem.  
  

Conclusion

   I’ve thrown quite a lot of information at you, but this is something I feel is extremely important—so important that if it continues to be ignored, the entire future of crypto could be at risk. We can all help to some extent by IGNORING dollar values in the alt coin market. I also believe that if Bitcoin went to $100, over time certain alts would gradually become worth 2, 3 or more Bitcoins, but how long that would take I have no idea. It is possible that if we were to have fiat pairs for all coins and ended any pairings to BTC, we could potentially reverse this problem, BUT if we did that, we’d then be dependent on fiat currency. That’s the opposite of what we want. Like I said above, I am not smart enough to solve this problem. I am simply pointing it out.    

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