Don't look at market caps

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I've long discussed the issues with media reporting and people looking at market caps of crypto currencies, so finally I get to write a post about what's wrong with it. If you think that I'll rant about all kinds of people making money despite that not being the point, you're wrong - I just want to give some examples how you can be misguided by market caps.

What is the market cap?

Oftentimes, market cap is referred to as the total amount of money invested in a single coin (or the whole market). Well, this isn't really what it is. Actually, market cap just describes the current market valuation of an asset based on its latest official price. What does that mean?

Imagine your coin is shown with a market cap of 100,000, because there are 100,000 units at 1$ each. Now, if there is very little trading activity and no trade happens for 24h, then the next trade, no matter how small, will bascially determine the new market cap. If the price is 10,000$, the new market cap will suddenly be 1,000,000,000$, even only 0.0001 units (=1$ volume) of the coin have been traded (imagine viewing this on coinmarketcap).

A similar thing actually happens when coins get pumped&dumped. This is usually done with coins which have really low volumes.

The Bitcoin case

Everybody knows that thousands and thousands of Bitcoin addresses (including some of mine), especially from the earlier days are deserted, keys lost, forgotten or whatever. There was this funny Reddit post about dormant Bitcoin addresses back in 2015, and it sure hasn't gotten better ever since.

So, obviously, not all of the 16,872,850 Bitcoin are accessible, so therefore we shouldn't be looking at the valuation of all Bitcoin.

If you think about the market caps of stock - well, your shares basically never can get "lost".

Available / traded supply vs free float

It's hard to come up with numbers for this one, but to most of us, it's clear that only a fraction of the coins which exist are traded frequently. That results in a small number of coins being churned at a high rate. If we compare this to the traditional financial world, we could compare that to the free float. Generally, most of the trading activity comes from the free float (the shares that aren't owned by big investors), and we could divide holders of coins into two groups: Those who trade or transfer their coins regularly and those who don't, but instead are long-term investors.

What else is there to say

I'm not an opponent of the general market cap idea per se, but like so many other things in crypto trading that have been simply transferred from the classic financial world, it may lack direct transferrability for number of reasons:

  • Stock exchanges are regulated, so additional rules apply (e.g. volatility interruptions)
  • Mostly big players participate there (often in the name of an end customer)
  • Trading only happens on a small number of exchanges and in very limited trading times (typically between 6 and 8 hours per day, often at a single exchange, only weekdays)

Therefore, please just take stories like "XYZ amount of value have been destroyed" with a grain of salt. Cheers!

Don't look at market caps | Ecency