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Author Topic: Cryptocurrency market cap misconception, this is not how it works.  (Read 157 times)
mikeywith
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January 12, 2019, 07:01:13 PM
Last edit: January 12, 2019, 08:30:24 PM by mikeywith
Merited by dbshck (5), Welsh (5), suchmoon (4), odolvlobo (1), LeGaulois (1), Pmalek (1)
 #1

Cryptocurrenc Market capitalization/ CMC / Market cap

  I always see many people look at market cap increase / decrease as if it's real fiat going in / out the market.

  this is pretty wrong, when you see the market cap increases by 10 billion dollars, it does not mean that 10 billion dollars were injected to the market.



let's first understand how is market cap calculated.

Market Cap =Current Price * Circulating Supply


plain and simple, it does not mean that there is an x amount of dollars "invested" in crypto, these coins were bought at different prices therefore the amount invested in USD is not something cmc can tell you, it's only an indication of the total "size".

for example, if someone wants to buy every BTC out there, whatever the market-cap shows is the amount he needs to pay to buy the whole market. but again this is just the theory it is not practically accurate simply because of this

1- The price will automatically increase the moment he starts buying therefore market cap will increase.
2- supply is going to increase therefore marketcap/size will increase too.

CMC is not even a very accurate number , one main reason is that many bitcoins are "lost".

The "lost bitcoins"  could be affecting the price due to less-current-supply but they don't count in marketcap.



at this point you should have already understood that when btc market caps jumps 10 billions, it could actually be due to 10 million dollars buy order that raised the price, with supply remaining constant or increasing marketcap must increase.

everything above applies to when marketcap drops too, it does not mean "money went out of the market" it simply means the price dropped.
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January 16, 2019, 08:55:52 AM
 #2

Thanks for sharing this. There are a lot of misconceptions surrounding Bitcoin, not just the market cap.

There are lot of factors to think about when considering the market cap. Probably someone who is not familiar with different trading terms such as the market cap could confuse someone.

The easiest way to introduce it is to know the total amount of BTC currently out in the market multiplied by the price, like in your formula. So once the price increases, the market cap also increases, vice versa. It doesn't say what the equity of the company.
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January 16, 2019, 04:05:35 PM
Merited by suchmoon (4), dbshck (4)
 #3

There is a "multiplier" effect that takes place when every dollar enters and exits the crypto space. As per an empirical study last year- I believe by Weiss Group, but I am not entirely certain- the multiplier effect for major cryptocurrencies like Bitcoin and Ethereum is around 32.5x. When you start going down trading shitcoins, this multiplier continues to increase dramatically.

In other words, if Bitcoin marketcap drops by 100 million, it means about $3 million of real dollars have left the market.
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January 18, 2019, 05:59:42 PM
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Can you consider moving this to the newbie/biginners boards, I believe it'll be of more helpful  since most of them don't know about this.

This is a general misunderstanding that the majority of the world have , it really isn't a newbie thing. even some large trading channels on telegram/FB who been trading crypto for years post shit like  " 20 billion $ left crypto today, where did it go ?"
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