Is it Time to Rethink the Crypto Market Cap?

In Insight

Cryptocurrencies are traditionally evaluated and ranked by their market cap. A high placement on CoinMarketCap’s top 100 is normally viewed as a badge of honor. But while market cap is a popular data point, there might be better ways of assessing the real value of cryptocurrencies.

What is market cap?

In traditional markets, market cap is usually calculated by multiplying the number of outstanding stock shares by the current stock price. Crypto market cap is defined as the total circulating supply of tokens multiplied by the current price of each token.

So if there are 100 tokens in circulation trading at 10 USD a token, the market cap would be 1,000 USD. That’s straightforward enough.

The need for more transparency

While stocks and bonds tend to be analyzed by financial metrics such as price-to-earnings ratio or earnings-per-share, most cryptocurrency teams don’t publish their financial statements. As a result, crypto market cap is often the only metric that traders and investors use to evaluate the overall performance of a coin (along with price).

 

 

A high market cap suggests a coin is resistant to volatility whilst a low market cap indicates the coin is likely to be more vulnerable. Not everyone agrees though. Some critics argue that crypto market cap is a meaningless metric.

Market cap can’t, for example, account for who holds a coin. If developers or “whales” own significant portions of a coin’s total circulation, any movement on their part could result in massive price swings, yet this imbalance would not be reflected in what is seemingly a healthy market cap.

Crypto analyst Nic Carter points out that this phenomenon led to such anomalies as Bitcoin Private having a 2 billion USD market cap upon launch, despite the fact that the vast majority of coins were never claimed by BTC and ZCL holders at the time.

New ways of valuing a cryptocurrency

 

Source: Kaiserex (2019)

 

An alternative to market cap is “realized cap”, proposed by Nic Carter in a 2018 report. Realized cap aggregates the value of a coin based on the price of each token when it last moved. This kind of calculation prevents overstating the value of a coin when it suffers from low liquidity.

For example, if a whale-sized wallet of 10,000 BTC has been inactive since 2014, those BTC would be valued at the price they were at the time, rather than using current valuations.

Coin Metrics adopted this approach in December 2018, so that their circulating coin supply reflects the different values of a coin based on the historical prices at which they were last traded.

Crypto ranking site CoinGecko also determines the ranking of the world’s top digital currencies based on factors other than market cap alone, using a range of criteria, like developer activity, community, liquidity and public interest.

Alternatively, adjusted market cap takes the price of a coin multiplied by the number of active coins in circulation. Active coins include all the claimed coins from forks and exclude so-called “lost coins”.

For example, it’s estimated that nearly 20% of the total Bitcoin supply may be lost – through misplaced devices, forgotten private keys, invalid recipient addresses and more.

Is it time to rethink the crypto market cap? Tweet us at @Liquid_Global to let us know your thoughts.

This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

WRITTEN BY

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