Why Crypto Market Cap is a meaningless valuation?
If you were to ask the average person in the cryptocurrency community where do they research and choose the best crypto asset to invest on, you will probably be redirected to Market Cap platforms like Coin Market Cap or Coin Gecko. In these sites you will find all these coins ranked based on their Market Cap but the sad reality is that there isn’t much value in these types of list, and using them doesn’t give you a correct judgement on how good a Cryptocurrency really is. So what really is Market Cap in the Crypto World? Why is it quite a useless way to evaluate a Crypto Asset?
What is the Market Cap of a Crypto Asset?
Market cap or market capitalization is a calculation that was taken from traditional finance like the stock market but it is one that has come its way to the crypto world. To put it simply, Market cap or market capitalization is calculated by multiplying the circulating supply of a cryptocurrency or token by its last transaction price. It’s a widely used metric for measuring the size and value of a cryptocurrency or token network.
It’s a simple calculation, which is perhaps why it’s so widely used and it stands to prove why the Crypto Market is so volatile. As these calculations are easily manipulated, and creates a false sense of value for most of the Investors on the Market. It also does not answer the questions as to why someone would pay $60,000 for Bitcoin? Or Why Ethereum and Cardano with the much superior Blockchain Network are ranked below Bitcoin? Or How One Coin was somehow amongst the top 10 in Coin Market Cap but the company turns out to be a scam after all?
Why is it a useless way to evaluate a Crypto Asset?
Market Cap doesn’t show the value of a Coin or Token
When you decide to begin investing, the first thing you would likely to find out most is the value of an asset or a token so you can begin to gather how much it’s actually worth and whether it is right now underpriced.
This is where the problem lies and as what you have known by now as Market Cap is all about the latest price each asset is bought and it does not reflect the value of the crypto asset you’re investing in. This is a fundamental distinction that is overlooked as prices are determined on what you are willing to pay for which is usually affected by the irrational sentiment of the market and has very little connection to an asset’s real value. Assuming that whatever the market is willing to charge for an asset is equal to what it’s worth is a big mistake.
Think about the crazy increase in market cap that the market recently experienced which made the crypto world reach the 2 Trillion dollar in market cap. What caused the increase in market cap? Did they get more users, launch a new technology, or achieve more mainstream adoption? What changes occurred to the underlying fundamentals?
All that happened was more investors were willing to pay a higher price. In the vast majority of cases, no underlying value was added to these assets, just more sheep willing to pay higher prices, which resulted in the market cap skyrocketing and as the market cap skyrockets, more sheep mistakenly believe the asset to have increasing value, and the cycle continues.
The critical takeaway, market cap is just an accumulation of the latest price with the circulating supply and has no reflection towards its value.
Market Cap doesn’t show the real money invested in the Market
Market cap not only doesn’t represent the value of a crypto asset but also how much money flown into the market and this is an exact representation of the market. Let’s say we have created a token on the Ethereum platform and on a few exchanges with 800 Billion in supply and convinced 1 person to actually buy it at $8.50. Boom you will have a token with the highest Market Cap beating Bitcoin. Of Course it is not that easy to make it to the ranking as you need to fulfill a lot of criteria but anyway you get the idea.
As you can see, it doesn’t mean $850 billion was invested in the token, and also in no way help understand that the token has value. Market cap only serves to obscure and create a false sense of value when actually it’s just a multiplication of the last transaction price by the circulating supply.
“Market cap created the perfect tool to attract newbies by artificially inflating the numbers. They mine 1 million coins and release a thousand in reality which they can buy for 10$ a piece. And suddenly that crap coin has a 10 million market cap and noobs flock. And in one week time, most of them get fleeced.” — Unknown
Crypto assets that are less valuable with enormous circulated supply can trick the ranking system and make themselves look as the next game changer. Market cap and changes in market cap are meaningless and sometimes could be really misleading for investors.
Circulating Supply is inaccurately counted
Circulating Supply forms the other issues with the calculation of Market cap. The problem is that it’s hard to tell how much of a coin or token’s supply is available for trading at any given time. As most Market Cap calculations do not exclude lost coins from the circulating supply count because there is no way to know or track how many are lost.
Take Bitcoin, for example. Much of the current Bitcoin supply is made up of bitcoins that have been inactive or lost for more than a year. If it is all accounted for, there will be a massive reduction in the current Market Cap for Bitcoin.
To put into perspective how inaccurate it is, let’s take another example in Tron (TRX). Tron was listed in Coin Market Cap on September 29th and started from $19.96M to currently $7.86B in Market Cap, standing in 31st rank in Coin Market Cap. Although there is a price increase from $0.002 to currently at $0.09 but the great factor is due to the increase in the supply of coins with $70 Billion in Circulating Supply. This is also another way for Coin to increase the market cap by increasing the circulating supply that might not be actively traded or transacted.
As you may know by now, the Market Cap of a Crypto Asset doesn’t actually reflect the true value and the underlying fundamentals. Probably the main solution for the volatility in the Crypto Market, is for investors to start reading the whitepaper of each Crypto asset so that you are less likely to be one of the sheeps that end up buying an overpriced token thus losing your money. If investors truly want to evaluate a coin or a token, evaluate them from the breakthroughs they make and the problems they are trying to solve instead of just following the market cap which is an unreliable method to measure
We in Nagaya Technologie Pte Ltd. surely believe that Cryptocurrency has been an amazing breakthrough that could be the solution to a lot of problems. It is quite inaccurate to measure the value of this breakthrough innovation just by the market cap but instead it should by the size of the problem it’s trying to solve. We aim to solve the issues faced by Cryptocurrency to become a global payment method preferred by all. Our vision to do this is by creating a hybrid digital asset that maintains the stability needed for making payments while providing enormous value for holders in the same concept called Nagaya. To know more and receive the latest information about Nagaya, you can visit us at nagaya.io
Or you can talk to us at t.me/nagayaofficial