Cryptocurrency Market Capitalizations are misleading

[Trofo]

Here is something I just realized today and I believe there is a lot of users who never thought about it.

As the title says: Cryptocurrency Market Capitalizations are misleading

When you look at the chart of Total Crypto Market Capitalization like this one on coinmarketcap, casual observer is probably thinking that we have lost more than 500B dollars of investment in cryptocurrency in one month. From almost 800B market cap has fallen to almost 250B in one moment (now we are back to almost 500B which looks much nicer).

However this is nowhere near the truth.
As most of you probably know Market cap = price x total coins in circulation which sounds ok until you give some thought to price and total coins factor. You don't know how much of total coins are available for trading and how much is in long-term storage or lost. The market cap of the coin doesn't tell you how much money is entering or leaving that market.

I don't know how to actually explain the problem so i will try with the example.
Lets say I have a total supply of the coin: 1.000 coins
I sell to my friend 1 coin for 10$
Market cap is now: 10$ x 1.000 = 10.000 $
My friend sells that same coin to his friend for 2$
Market cap is now: 2$ x 1.000 = 2.000$
So you could come to conclusion that my project lost 8.000$ dollars while in fact only few dollars changed hands and only 1 coin has been sold. 999 coins stayed in long-term storage. This is of course highly unrealistic example but I hope you get the point.

It is really difficult to get to correct numbers for the amount of dollars that crypto investments lost during this crisis, but most people/articles seems to agree it should be in the range of 50B dollars. Nowhere near 500B as the market cap would lead you to believe. Same goes for the bull runs as well. When you take above into consideration then the whole thing with volatility in the market is much easier explained.

I hope I have given you something to think about. If this is mentioned in some other topic please put the link in the reply because I haven't stumbled on the matter trough my browsing of the forums.

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[shulio]

This is also true for the traditional stock markets. Traders (buyers / sellers) always have more influence on prices than hodlers. This always makes me think that the economy is a lie.

[amishmanish]

This is also true for the traditional stock markets. Traders (buyers / sellers) always have more influence on prices than hodlers. This always makes me think that the economy is a lie.

Well the way I have read it being rationalized is that the "Stock market rewards promising businesses by diverting more funds towards them as their stock prices increase". The way i understand is that if "investors, i.e. traders" feel that a particular company like Tesla, SpaceX has a lot of potential then they will buy up their stocks driving the price up. This increase in stock value makes the company valuable and allows it to continue to make capital investments by making funds available for that.

I wouldn't go so far as saying that the economy is a lie. The system does work and it does reward innovative companies and daring entrepreneurs. What is indeed missing, is the redistribution of wealth or the trickle down effect that was promised. That probably has more to do with the coziness of big business interests and the governments.

However this is nowhere near the truth.
As most of you probably know Market cap = price x total coins in circulation which sounds ok until you give some thought to price and total coins factor. You don't know how much of total coins are available for trading and how much is in long-term storage or lost. The market cap of the coin doesn't tell you how much money is entering or leaving that market.

The market-cap for a normal company can also consist of the shares held in long term by the major shareholders/ partners. They are calculated for market-cap irrespective of that.
Plus the only major decision "market-cap" helps with is to associate the risk vs reward that company stocks offer. For example, a small-cap company will be riskier but have more possibility of giving bigger returns. Ditto for the altcoins. (Its a completely different matter that most of them are not trustworthy). A large-cap company like Apple may not give huge returns but is a comparatively low risk investment.
I don't know what else can market-cap be used for. Maybe the traders can correct me.

The reason that Market capitalizations are misleading is because if you make investment decisions on their basis (risk vs reward), its not the same as in the normal stock market. A small cap coin like MCAP has higher risk but no commensurate chances of high returns because it is basically a SCAM. Similarly, A highest cap coin like bitcoin may not be very stable but still give you huge returns. That seems to be the reason that market caps are misleading. A coins marketcap tells you nothing about its actual utility. Shitcoins get pumped that don't mean ANYTHING while good projects languish for the lack of marketing.

[HasHe]

Yes you are right.That's why,marketcapitalization should not be seriously taken to determine the potential of a coin.It does not express the original figure.Any one could manipulate even the marketcap of a shitcoin easily.Just by placing a high sell order and completing it,the marketcap of a coin could be easily manipulated.It clearly shows that marketcap should no more be considered to evaluate a coin.

[cindygirl]

Market cap is really quite a useless metric if you do not understand the point that you just made. It also helps to explain the suspicions around USDT, many people comment that USDT only has a market cap of 2b but that's quite a moot point in my opinion. It does not take many dollars to move the market by a significant amount.

[audaciousbeing]

I don't know how to actually explain the problem so i will try with the example.
Lets say I have a total supply of the coin: 1.000 coins
I sell to my friend 1 coin for 10$
Market cap is now: 10$ x 1.000 = 10.000 $
My friend sells that same coin to his friend for 2$
Market cap is now: 2$ x 1.000 = 2.000$
So you could come to conclusion that my project lost 8.000$ dollars while in fact only few dollars changed hands and only 1 coin has been sold. 999 coins stayed in long-term storage. This is of course highly unrealistic example but I hope you get the point.

It is really difficult to get to correct numbers for the amount of dollars that crypto investments lost during this crisis, but most people/articles seems to agree it should be in the range of 50B dollars. Nowhere near 500B as the market cap would lead you to believe. Same goes for the bull runs as well. When you take above into consideration then the whole thing with volatility in the market is much easier explained.

I hope I have given you something to think about. If this is mentioned in some other topic please put the link in the reply because I haven't stumbled on the matter trough my browsing of the forums.

Although I love your analysis which I am impressed about and also not saying that the market capitalization is perfect because there are several factors beyond the calculations but generally your calculations is not the way it works based on my submissions as follows:

1. Concerning the price you quoted in your example, the price that is being used to calculate the market capitalization is not the price you sold or the price your friend bought it but rather the average price of what its being bought in the entire market that is why several exchanges have different price they quote.

2. The amount that you sold to your friend has left you and not that the coins is being multiplied which means its still the same coin that is being valued. The coin remained the same while the average price has only changed. In essence, the real value of any commodity is what it can be exchanged now and not what it exchange last week or what it will exchange this week.

3. On the amount of coins in the vault, you can keep your coins and simply by holding it will lose value. In calculating market capitalization, every coins mined is valued whether traded or not traded. Just like fiat when Central Banks release the amount of money in circulation, it does not means they are all in banks but it the total of whatever we have in banks, private vaults, stores, wallet, pots, safes and even those buried underground or burnt.

[jmlona]

I don't know how to actually explain the problem so i will try with the example.
Lets say I have a total supply of the coin: 1.000 coins
I sell to my friend 1 coin for 10$
Market cap is now: 10$ x 1.000 = 10.000 $
My friend sells that same coin to his friend for 2$
Market cap is now: 2$ x 1.000 = 2.000$
So you could come to conclusion that my project lost 8.000$ dollars while in fact only few dollars changed hands and only 1 coin has been sold. 999 coins stayed in long-term storage. This is of course highly unrealistic example but I hope you get the point.

It is really difficult to get to correct numbers for the amount of dollars that crypto investments lost during this crisis, but most people/articles seems to agree it should be in the range of 50B dollars. Nowhere near 500B as the market cap would lead you to believe. Same goes for the bull runs as well. When you take above into consideration then the whole thing with volatility in the market is much easier explained.

I hope I have given you something to think about. If this is mentioned in some other topic please put the link in the reply because I haven't stumbled on the matter trough my browsing of the forums.

Although I love your analysis which I am impressed about and also not saying that the market capitalization is perfect because there are several factors beyond the calculations but generally your calculations is not the way it works based on my submissions as follows:

1. Concerning the price you quoted in your example, the price that is being used to calculate the market capitalization is not the price you sold or the price your friend bought it but rather the average price of what its being bought in the entire market that is why several exchanges have different price they quote.

2. The amount that you sold to your friend has left you and not that the coins is being multiplied which means its still the same coin that is being valued. The coin remained the same while the average price has only changed. In essence, the real value of any commodity is what it can be exchanged now and not what it exchange last week or what it will exchange this week.

3. On the amount of coins in the vault, you can keep your coins and simply by holding it will lose value. In calculating market capitalization, every coins mined is valued whether traded or not traded. Just like fiat when Central Banks release the amount of money in circulation, it does not means they are all in banks but it the total of whatever we have in banks, private vaults, stores, wallet, pots, safes and even those buried underground or burnt.

I think the points that were trying to be raised are these:

1. Market cap can be moved by millions or billions of dollars with just one transaction for a much smaller amount than the overall market cap moves..


2. Just because there is a market cap of x amount does not mean that this is the real valuation. This is true for anything, if all bitcoin went to market tomorrow the price would crash because there would be an excess supply, they would not trade at 10k and so the market cap based on a price of 10k is not an accurate representation.

[Thirdspace]

do not interpret market cap individually,
you also need to take coin supply and trade volume into consideration
using data in the last 24 hours of these three factors would give you an idea
if you use bigger data, a week worth of statistics, you can get even a better idea on what's going on

[Trofo]

do not interpret market cap individually,
you also need to take coin supply and trade volume into consideration
using data in the last 24 hours of these three factors would give you an idea
if you use bigger data, a week worth of statistics, you can get even a better idea on what's going on

I completely agree with quoted, and that is the way how I am doing it. Idea behind my original post was just to warn people that statement like: "crypto investments lost 500B $ in one month" is at least misleading if not an outright lie. Even though charts at coinmarketcap are saying exactly that and are correct. The statement comes from wrong interpretation of mentioned chart.

I wanted to make people a little more aware that market cap of the coin doesn't tell you how much money is entering or leaving that market.

[jseverson]

Market cap shouldn't even be used in these scenarios in my opinion. It's way too simplistic to accurately gauge the value of a complicated and volatile market. Selling and buying not only affects the circulating supply, it also affects unit prices and the net effect doesn't seem to be linear. That means the market cap value lost doesn't necessarily equal the value dumped.

I only really find it useful when comparing crypto values where you can't rely on solely the price per coin.

[Thirdspace]

I wanted to make people a little more aware that market cap of the coin doesn't tell you how much money is entering or leaving that market.

yes exactly. It just like reading a company's annual report and you only look at balance sheet
balance sheet is only showing company's financial position at specified time (end of year)
you need also at least to read income statement and cash flow statement to understand that company's operations and healthiness

so, to reiterate and emphasize
market cap should be read side by side at least with its coin supply and trade volume
then you can grasp the coin's basic valuation and you need to follow its developments to know its potential

[dado7]

What you wrote Trofo is totally true and an excellent observation. Just like with any statistical mish mash, market capitalization shouldn't be the sole factor for evaluation of the market.
It's not specific for the crypto market and is certainly not the greatest statistical error we can find out there.

One usual great mistake that I always remember is the evaluation of the music industry profit loss due to the piracy. They always calculate the loss as if everything downloaded people would otherwise buy in the stores. The other one that I can remember of is the average net salary. It could be much higher then the true condition would suggest if the social segregation was bigger (like only 1 or 2% percent of people holding the most of the wealth).

That is while statistics are a great tool, but very flawed as well and can be used for speculation and marketing purposes. The best example of the misuse is the one done by the so called rating agencies. Those guys basically decide about the cash flow of one country as they prefer (basically as ordered by a third party) using statistics  (rating A would mean that yours is a not a credit risky country and that the investments can be pushed in alongside the creation of the debt (external debt of the country)...... later they could put you in category C or D, tighten the cash flow and force people to sell their real estates to the banking sector....).

When you apply only statistics without logic you are bound to make some mistakes in judgment.

Hence it is important to observe market capitalization, make fundamental and technical analysis, observe trading statistics, always keep a close look at moving averages, short, middle and long-term trends etc. It is not a secret that crypto market is not decentralized as it should be due to the existence of the whales and it's susceptibility to FUD. Hence it also shouldn't come as a surprise to find out that many "big players" use statistics and FUD to play with the prices as they like making fortunes in the process.

[hase0278]

Here is something I just realized today and I believe there is a lot of users who never thought about it.

As the title says: Cryptocurrency Market Capitalizations are misleading

When you look at the chart of Total Crypto Market Capitalization like this one on coinmarketcap, casual observer is probably thinking that we have lost more than 500B dollars of investment in cryptocurrency in one month. From almost 800B market cap has fallen to almost 250B in one moment (now we are back to almost 500B which looks much nicer).

However this is nowhere near the truth.
As most of you probably know Market cap = price x total coins in circulation which sounds ok until you give some thought to price and total coins factor. You don't know how much of total coins are available for trading and how much is in long-term storage or lost. The market cap of the coin doesn't tell you how much money is entering or leaving that market.

I don't know how to actually explain the problem so i will try with the example.
Lets say I have a total supply of the coin: 1.000 coins
I sell to my friend 1 coin for 10$
Market cap is now: 10$ x 1.000 = 10.000 $
My friend sells that same coin to his friend for 2$
Market cap is now: 2$ x 1.000 = 2.000$
So you could come to conclusion that my project lost 8.000$ dollars while in fact only few dollars changed hands and only 1 coin has been sold. 999 coins stayed in long-term storage. This is of course highly unrealistic example but I hope you get the point.

It is really difficult to get to correct numbers for the amount of dollars that crypto investments lost during this crisis, but most people/articles seems to agree it should be in the range of 50B dollars. Nowhere near 500B as the market cap would lead you to believe. Same goes for the bull runs as well. When you take above into consideration then the whole thing with volatility in the market is much easier explained.

I hope I have given you something to think about. If this is mentioned in some other topic please put the link in the reply because I haven't stumbled on the matter trough my browsing of the forums.

It really is difficult to get the correct amount of dollars that crypto investors lost during the crisis but the calculation of marketcap is also the same when it comes to gold, commodity, fiat currency, and any other things with value. That estimation of total loss might not also be accurate and is a little far from the real value of loss because it is also based on the market capitalization before the crash. They should have had also considered those who bought Bitcoin at lower prices and held up to date, since they have not lost anything from this current crash. Although I said it, it is easier said than done because it is hard to determine how many Bitcoins are bought at lower prices.

[avikz]

Here is something I just realized today and I believe there is a lot of users who never thought about it.

As the title says: Cryptocurrency Market Capitalizations are misleading

When you look at the chart of Total Crypto Market Capitalization like this one on coinmarketcap, casual observer is probably thinking that we have lost more than 500B dollars of investment in cryptocurrency in one month. From almost 800B market cap has fallen to almost 250B in one moment (now we are back to almost 500B which looks much nicer).

However this is nowhere near the truth.
As most of you probably know Market cap = price x total coins in circulation which sounds ok until you give some thought to price and total coins factor. You don't know how much of total coins are available for trading and how much is in long-term storage or lost. The market cap of the coin doesn't tell you how much money is entering or leaving that market.

I don't know how to actually explain the problem so i will try with the example.
Lets say I have a total supply of the coin: 1.000 coins
I sell to my friend 1 coin for 10$
Market cap is now: 10$ x 1.000 = 10.000 $
My friend sells that same coin to his friend for 2$
Market cap is now: 2$ x 1.000 = 2.000$
So you could come to conclusion that my project lost 8.000$ dollars while in fact only few dollars changed hands and only 1 coin has been sold. 999 coins stayed in long-term storage. This is of course highly unrealistic example but I hope you get the point.

It is really difficult to get to correct numbers for the amount of dollars that crypto investments lost during this crisis, but most people/articles seems to agree it should be in the range of 50B dollars. Nowhere near 500B as the market cap would lead you to believe. Same goes for the bull runs as well. When you take above into consideration then the whole thing with volatility in the market is much easier explained.

I hope I have given you something to think about. If this is mentioned in some other topic please put the link in the reply because I haven't stumbled on the matter trough my browsing of the forums.

That is the basic way to calculate market cap of any investment or trading asset. Same is true for real-world stocks or bonds as well. While the total circulation of coin will always be factored in, the price depends on the exchanges. I believe coinmarketcap uses average method while calculating the value or market cap of a particular coin and it is the best method to use. Let me try to explain it below,

For bitcoin, let us assume that the coin is trading at below prices in various exchanges,
Exchange A: $10,000
Exchange B: $9,998
Exchange C: $10,005
Exchange D: $9,990

So, the price of the coin will be calculated as per the average value which is, ($10,000 + $9,998 + $10,005 + $9,990)/4 = $9,998.25 (market value of bitcoin)

The second part is the number of coins in existence. Since it is impossible to know how much coins are in cold storage or how much is burned out. The best approach is to factor in all coins in existence. Lets assume, we have 3,000 bitcoins in existence. So the as per the above scenario, the market cap of bitcoin will be,

$9,998.25 X 3000 = $29,994,750

I am sure there are flaws in the market cap calculation, but this is the best approach that is adopted by the industry. We can't say it is misleading because it gives you an idea of the overall market.

Coinmarketcap excluded all South Korean exchanges from their calculations in recent past because the value of bitcoin was significantly higher. When bitcoin was traded at $10k, the South Korean exchanges were trading it at $15k, which was actually misleading. But after the exclusion of those exchanges, the current market cap and price is somewhat near to the reality.

[kissme09]

This is also true for the traditional stock markets. Traders (buyers / sellers) always have more influence on prices than hodlers. This always makes me think that the economy is a lie.

Everything we see is a lie, but lies bring about many things. But the whale always draws the dream road for those who are stupid, and then they clear the road that many desperate people do not know the next step.

[oddwh]

Yes, there was an article somewhere who was refering about this some weeks ago. This article stated that there was around 10bn$ really invested in crypto. This is much lower and can be reassuring for the potential market cap growt we can expect   10bn$ is still a low amount invested, that's why we can still consider we are in the early days.


Anyway this is the same for crashes, we don't need hundreds billions $ to crash the price, much lower is enough.

e/ : just found the article from my olders posts : http://jamescrypto.com/the-difference-between-inflow-and-market-cap-and-how-it-relates-to-tethers/

[aardvark15]

I get your point, but the price usually doesn’t vary a great deal from one exchange to another so I don’t think you will see such a drastic price difference in reality. Market Cap to me is just a way to compare the value of one project to another since the number of coins is different per each project. It’s just one thing to look at in comparing coins among many different things.

[BillCoin]

This is also true for the traditional stock markets. Traders (buyers / sellers) always have more influence on prices than hodlers. This always makes me think that the economy is a lie.

I agree with you that this thing happens also at the stock market, but it happens much more at the crypto market, as there are massive holders that are unknown, at the same time, at the stock markets, you know who holds what and you can't really hold shares without revealing your identity, so if someone owns 20% of the shares, you will know that, but if someone owns 20% of all existing bitcoins, it would be impossible to know that because he may spread it over a lot of addresses around the network.
The whole thing about market cap is a lie and people shouldn't rely on it, because it's really easy to manipulate the market cap, but it doesn't mean that there is enough liquidation at the current price to buy all existing coins,I guess not.

[Kprawn]

I roll my eyes when I see the media commenting on how Bitcoin lost say, 50 Billion Dollars in a single week.  ...How are

they doing that calculation? Did they add the total amount of Dollars or other currencies than bitcoins were sold for at

different times during that week or did they simply round it off? { 20 000 coins were sold x whatever the price were, when

they did their article? } Do they know how many coins were traded in private 1 on 1 trades? {impossible} 

[dado7]

I get your point, but the price usually doesn’t vary a great deal from one exchange to another so I don’t think you will see such a drastic price difference in reality. Market Cap to me is just a way to compare the value of one project to another since the number of coins is different per each project. It’s just one thing to look at in comparing coins among many different things.

I would also use it more occasionally to check the ratios, not the absolute amounts. Total maket cap amount can only show us a market trend, which is very useful, and individual market caps will be of more use once the market will be more mature and stable.

I roll my eyes when I see the media commenting on how Bitcoin lost say, 50 Billion Dollars in a single week.  ...How are

they doing that calculation? Did they add the total amount of Dollars or other currencies than bitcoins were sold for at

different times during that week or did they simply round it off? { 20 000 coins were sold x whatever the price were, when

they did their article? } Do they know how many coins were traded in private 1 on 1 trades? {impossible} 

They simply look at the market cap and as OP noted - as a single tool it doesn't work.