I admit it: I haven't really understood the concept of Market Cap, even though I'm playing now for quite a while with cryptocurrencies. However, this morning I've discovered a good explanation on reddit, that made things clear for me. So, what is Market Cap? Let me quote:
Market Cap is not actually invested money!
An example: Let's say that a coin is being given away for early investors. The number of coins is limited to 1,000. 10 people buy shares of 100 coins each for $1/coin. Now the coins are available at an exchange. But only one early investor is selling them. The other 9 are hodling their 900.
The coins AVAILABLE for trading (100) are bought and sold for some time. More and more people want to buy one for themselves.
Over time the price goes up to 1,000 Dollars.
Market Cap has reached $1,000,000 (1,000 coins x $1,000).
People have not invested that amount of money!
9 people bought 900 coins for $900, the remaining 100 coins were sold for the total amount of $100,000.
Every cryptocoin is high risk investment. Do not invest money you can't afford to lose. Don't let market cap fool you. It all depends on scarcity of available coins - hence the value of BTC which even at current prices has NO everyday use. People are not using it as a form of payment in their lives. And it doesn't make sense neither: who would pay for a cup of coffee with a coin that has no stable value, that can be worth $1 one day and $10 dollars the next?
And here's yet another example highlighting that Market Cap is not actually invested money:
Imagine me and Jimmy have made Applecoins. I have 6 applecoins and Jimmy has 5 (total supply is 11 applecoins). Now Tom wants to buy 1 applecoin from us for 1 dollar. So the total money inflow is 1 dollar into our applecoin system. But now we have applecoin marketcap at 11 dollars. Now we decide to make an ICO. We sell all Applecoins that we have (10) at 2 USD per coin. Now the marketcap is 22. After our coin hits an exchange 5% of coins that were distributed are sold at 50 USD. Now the marketcap is 550 USD. Eventhough the total money inflow was only 27 USD (because 5% of 10 coins is 0.5 and it's sold for 25 USD (50 USD per coin), the initial 1 USD and then the ICO 10 USD. So, to reiterate, you don't need to have an inflow of 2 billion dollars to increase marketcap by 2 bln.
Lately we have often seen news-articles stating "Crypto Currencies have reached for the first time a Market Cap of XXX billion dollars". However, when considering the pricing mechanism described above, the actual invested sum of fiat money might be much smaller.
This in turn can be interpreted in such a way, that cryptocurrencies are potentially highly overrated; prices are being driven by bright future expectations and not necessarily by invested fiat money.
However, if this is true, future inflows of money (say: due to the SEC allowing Bitcoin-ETFs) could cause another price rally.
I'd love to hear what you're thinking about the issue. Do you agree or disagree with my thesis?