Almost any time I hear someone speak about crypto, the word marketcap(MC) comes up. Whether to validate a coin as an established player or something that is a "low cap gem" to be caught before it starts to pump in price or even to say that a coin is a scam because its MC cannot be determined unanimously by all "coin ranking" sites.
The below information was sourced from We Are All Satoshi on youtube; I will link the video at the bottom.
First off, let's establish what creates the MC for anything. It is very simple, circulating supply of a given asset or number of units available, multiplied by the last transaction price. Easy enough. Bitcoins current circulating supply is 18,974,687 BTC, we then multiply that by its price of $39,096.54 at the time of writing and we get $741,844,609,282.98 MC. This will fluctuate every time the price moves, but do the math for yourself just to be sure.
Now its time to take the red pill and see through the bologna.
Let's define what MC for crypto is: the attempt to assign value to an entire ecosystem of a token or coin. The problem with this attempt is, its false, but before we go any further let's take a look at how order books work in traditional finance.
A transaction in a traditional order book happens, when a buyers bid price comes up high enough and when a sellers sell price meet, thus a transaction has taken place. The problem with using the last transaction price for MC is the last transaction price has already ceased to exist, and the bidders and sellers continue playing the game until someone meets again at a new price and creates the next transaction.
Lets take a look at the chart below:
This is what an order book looks like visualized, it is an older book for bitcoin, when it was around $10,400. The green line going from the middle to the left is the buyers and the red line from the middle to the upper right of the chart is the sellers. The further to the left we go, which is lower in price, the more people want to buy. This value is cumulative, meaning the people wanting to buy at $10,300 are counted in the same buy group as the people wanting to buy at $10,000. They are essentially all competing to meet a seller.
Conversely if someone is looking to buy at $11,000, they are getting the entire sell curve under the $11,000 range to the $10,400 mark. But there is no buyer or seller once we reach a certain transaction price, because we have a sell order and buy order side of the book. This means by definition that they are not connected. Stick with me here.
Let's compare this to an insurance policy and how it works. For example, your couch just broke. Now you need to know whether it was assessed at market value(sale price), or replacement value. If we are getting a new couch at replacement value, we get the couch replaced with the value it originally was purchased for; but if it is replaced with market value, you will only get what it would be worth for resale value today(a lot less than new value).
We can compare the replacement value insurance policy to the seller on an order book, and conversely we can compare the market value replacement with the bidder.
So we have to ask the question, is the value of a couch computed at what someone would buy it for? or what somebody would sell it for? In other words, which side of the order book is the market cap computed with? This is an important question as it will give you completely different results.
There is a massive assumption in MC: every single seller and buyer, even those who do not want to sell and buy, are at the last transaction price(which if you look at the chart above would be where the diagonal lines intersect in the middle). We can clearly see on the chart that this assumption is completely untrue.
So untrue in fact, that it holds no value whatsoever and is completely made up entirely. Remember the MC calculation we did for Bitcoin? Let's use that same calculation to make a $1 Billion token in 2 steps.
Step one: Create a token that has a circulating supply of 1,000,000,000 tokens.
Step two: sell one token, for $1, to anyone.
Voila, You now have the 78th largest MC in crypto.
I hope you are starting to see how absolutely ridiculous this whole premise of MC is. So, why do we even use it then?
Being able to measure the value of an ecosystem is important. There is a rule that states, "For everything you want to measure, there is some way of measuring it, which is better than not measuring it at all". The problem is, this gets confused with "Since this is a way of measuring it, it is better than not measuring it at all" aka the politicians fallacy(which was first documented in 1988 on the BBC television station during a political sitcom).
The massive assumption here, is that Liquidity at the last transaction price is infinite. We can clearly see now that this a blatantly false assumption, and since we know the assumption fails, so does the way of measuring. This would be a failure in any sound engineering.
There is no clear way to measure an ecosystem, but MC is clearly not the way to do it. Maybe there just is not a way to evaluate the value of an ecosystem. We just cannot use MC based on last transaction price knowing that there is a false assumption being made.
Now that we have reduce the parameter of MC from crypto what do we have? We have Price, total Supply, Price history, Available Liquidity as well as the utility or function of the token or coin. Now let's ask the question, what really matters?
Price History shows us how what the coin or token has done previously and can give us an idea of what it might be able to do if the supply in Liquidity Pools gets bought up. Utility or function can show us wether or not the token can keep us afloat even in a bear market eg. Staking and earning more of the token to offset losses in gains. There is also the question of price. Does it matter more when you are selling or when you are buying? Or is price the only thing that actually matters?
What do you think?
Let's analyze Hex for a second now. Hex has been stuck at position 201 for over a year now on coinmarketcap, which you can see here: https://coinmarketcap.com/?page=3 . The claims have been that because the circulating supply cannot be properly determined and the marketcap not properly calculated, we must hide it as a suspected scam coin.
Now that we know MC is a false and made up value, maybe you are starting to see how your view of crypto and specific tokens can be skewed by something that is completely made up. The entire premise of a "coin ranking site" has no validity to the relevance or valuation of a given crypto. The only things we believe that really matters at the end of the day is price, what the utility/ value proposition of the coin/token is, as well as how well it is marketed.
Drop a comment below and let us know what your thoughts are on the topic of marketcap, we would love to know! Thanks so much for reading and be sure to look out for daily blogs.
- CRYPTOGRFX