Need to better understand what market cap means

[Shastatimer2]

Hello everyone,

I need clarification on the concept of market cap, please. I am referring to market cap and not fully diluted market cap.
And my question concerns tokens that use existing blockchains (such as play-to-earn on BSC).

So, if I understand correctly, the formula for market cap is token price x number of tokens in circulation.

Hence my first question: What is meant by tokens in circulation?

I understand that this refers to ALL tokens in circulation, meaning all tokens that are not locked, burnt, etc.

Generally, among the major categories that appear in a project's tokenomics: we see financing rounds (Seed, private, strategic, public), the ecosystem, liquidity funds, budgets such as marketing, and then the team, the community, etc.

If I understand correctly, does this mean that a token that is not locked, whose purpose is for marketing and not for liquidity, still enters into the calculation of the market cap?

My second question is this: How is the token price calculated?

On CEXs, I suppose it's the law of supply and demand, so it must be the price of the last buyer?

But on DEXs, how is it defined?


***
slight digression: If what I said in my first point is true, I have the impression that for a lot of projects (especially in the play-to-earn space), the number of tokens in circulation listed on sites like Coingecko or CoinMarketCap is not at all correct, or am I mistaken?
****

One last question, which is actually a concrete example.

Let's take the example of a new project with the following characteristics:

- It has 10 million tokens
- 1 million are sold during an ICO at a price of $1
- The remaining 9 million are locked.

So if I understand correctly, the market cap is $1 million, right ?

If one million tokens that were locked suddenly become unlocked, assuming nobody sells or buys, the only thing that happens is that these 1 million tokens are unlocked.

Naturally, the price of the crypto will drop to $0.5, right?

Because if the price doesn't drop to $0.5 and remains at $1, it means that for crypto projects, all they need to do is generate new tokens to increase their market cap, which doesn't make sense to me.

That's all.
Thank you for your help.

[jackg]

What you're saying about dexes does make sense and I'm not too sure how it's handled (like I don't know if weth is an individual token or if it's included in eths cap but if we assume it is then market cap checks out - ie the coins still exist but they're wrapped as a token so they're still somewhere).


If you have 1 million tokens each worth $1 and an extra 1 million are unlocked the market cap doesn't have to fall, but it probably will. If no ones watching it well then it'll be able to keep its $1 price until those extra million move, if they don't move and are just unlocked and held for a while (and get sold strategically for example) then you can expect the coin to maintain its market cap or double it (but then there's things like if a coin isn't allowed to go over a certain amount before more coins are sold they might start dropping for that - for being less competitive than coins in other places).

[hr[

Compound might be a good example of how market cap either dies or stagnates (I've not paid interest in the past from comp making up the difference - a lot of defi tokens are similar).

[OcTradism]

Bitcoin vs. Altcoins – projected Marketcap

Different marketcap terms but you must be careful when using or believing in marketcap. With altcoin projects that have very wild volatility, their marketcap can change quickly from the moon to the hell. If you are in a bear market, you will see how potential projects in bull market will be tested by the bear and those project marketcaps will be divided many times even more worse than your imagination.

[death69]

Well, howdy there!

When we talk about cryptocurrency projects, market cap is a mighty important metric to size them up. And it sure tickles my funny bone to see you asking about it! Now, to answer your first query, tokens in circulation refer to all tokens that are on the loose and ready for trading. This covers tokens held by the team, investors, and those earmarked for marketing, liquidity, or other goals. So, if a token is out there and isn't tied down, it'll be counted in the market cap tally.

Now, as for your second question, the token price is like a fickle pickle and depends on market forces. It can vary depending on the exchange or platform where it's traded. On CEXs, the price is determined by the last trade executed by a buyer and a seller. On DEXs, the price is determined by the liquidity pool, which is driven by the ratio of tokens supplied and demanded.

Let's say we've got a new project with 10 million tokens, and 1 million of them were sold at an ICO price of $1. In this case, the market cap would be $1 million. But if a million tokens suddenly got unlocked, the price would take a nosedive to $0.5 if there are no buyers. But hold your horses, partner! Market cap ain't no perfect metric, and it can be tampered with by projects generating new tokens to inflate their market cap. That's why you should also consider tokenomics, team experience, and community adoption when sizing up a project.

Hope I've cleared things up for you, partner! And remember, always do your own research and due diligence when investing in cryptocurrency. Happy trails!

[rat03gopoh]

I understand that this refers to ALL tokens in circulation, meaning all tokens that are not locked, burnt, etc.

Yes that's right, just those two, nothing else.

If I understand correctly, does this mean that a token that is not locked, whose purpose is for marketing and not for liquidity, still enters into the calculation of the market cap?

Liquidity token can also be withdrawn from the liquidity pool, so it is included in the circulation supply.

My second question is this: How is the token price calculated?

On CEXs, I suppose it's the law of supply and demand, so it must be the price of the last buyer?

But on DEXs, how is it defined?

Basically selling/buying at the last price on any exchange is the current price as far as the price is publicly displayed. Price aggregators such as CMC calculate the average of the transaction prices of all the exchanges they monitor.

Naturally, the price of the crypto will drop to $0.5, right?

No, current rates still apply. Fixed prices are affected by supply and demand, not supply.

[Tytanowy Janusz]

But on DEXs, how is it defined?

Simple maths. The amount of coins in liquidity pools divided by each other. Example:

Project get listed on pancakeswap and founders put 1 mln tokens and 1 mln USDT into pool as startup liquidity.

1 mln USD / 1 mln tokens = 1 USD/token

Now You came and do a buy order using 10 000 USDT. Now, inside pool, we have 1.01 mln USD and around 990k tokens (a little more due to slippage but lets use that to make it simple to understand).

1.1 mln USD / 0.99 mln tokens = 1.11 USD/token - new price.

why CEX price = DEX price for most of the time? because of arbitrage traders and their trading bots that in any time can buy on dex and sell on cex for tiny profit (and vice versa). Spread is so tiny because they are constantly competing with each other.

[joniboini]

If one million tokens that were locked suddenly become unlocked, assuming nobody sells or buys, the only thing that happens is that these 1 million tokens are unlocked. Naturally, the price of the crypto will drop to $0.5, right? Because if the price doesn't drop to $0.5 and remains at $1, it means that for crypto projects, all they need to do is generate new tokens to increase their market cap, which doesn't make sense to me.

Why did you assume the price will drop? Your previous description about the market cap is more or less correct (some members already clarify it for you), and I don't see why you would assume any price change if there is no change in trading activity (volume, etc). In an ideal world (for the project team at least), that would increase the market cap instead. So yes, a project can increase its market cap anytime it wanted to, but no one would buy their tokens at all. If a team can increase its own holding then it means it can create as many tokens as it wanted to dump on the market, which will drive the price down regardless of how big its market cap is. No one would like a token like that.

That being said, it is true that most of the time when a token unlocks happen the token price would decrease because the selling pressure is increased while buy orders decreased. The reason why those tokens are locked is that they want to prevent people from selling them anyway, and keep the price up. As far as I'm aware, this metric is not being used by most traders nowadays. At least those that I know of. Sometimes they would see the fully diluted market cap as a comparison to see if it is worth trading the tokens for mid-term or daily (or holding it for the long-term). Most of the time though they just don't care and look at the charts. CMIIW.

[Shastatimer2]

Hello,

Thanks for your answers.
You're right, my approach was not really correct.
I assumed that the price would drop by 50% in this scenario because I have always considered the market cap, alone, as an indicator of the trustworthiness of a token.
And to me, I could not believe that it was possible to artificially make the market cap of a token increase.
Yet, it's the case.
I'll just take an example just to make it clear, that I understood the things right.

For instance, if 10 fraudulent people launch a new token. Token price is 1$, 10000 tokens are available to be purchased, which is 1% of the supply.
They buy 10000$ overall.
Then, they artificially increase their market cap by releasing the tokens that were locked. The price can only increase because they won't sell their tokens, and new people may buy the tokens, .
If they release, let's say 50¨% of the overall supply, that will be 500 000 tokens available, with a marketcap price of at least 500 000$, right?

And in this scenario, if one takes the sole marketcap as a trustworthiness indicator, that'd be actually a huge mistake.

So one could say that instead of taking the market cap as an indicator, one could also take the token price. But it makes sense as you said that when tokens are unlocked, the price decreases. So price isn't enough.

And the numbers of holders neither. Because I assume that fraudulent people could create a lot of different wallets to buy the tokens, which would make people think that there are a lot of holders, when there actually isn't.

So what I'm starting to deeply understand is that actually, one shouldn't trust these numbers alone, and it's much more complex than that.
One should'n take these numbers are reflecting perfectly the health of a token. Even if they give a good idea, most of the time, of what's going on.
And you helped me understood it , so I thank you very much

[rat03gopoh]

For instance, if 10 fraudulent people launch a new token. Token price is 1$, 10000 tokens are available to be purchased, which is 1% of the supply.
They buy 10000$ overall.
Then, they artificially increase their market cap by releasing the tokens that were locked. The price can only increase because they won't sell their tokens, and new people may buy the tokens, .
If they release, let's say 50¨% of the overall supply, that will be 500 000 tokens available, with a marketcap price of at least 500 000$, right?

The status of the "locked" token can actually be validated on the smartcontract whether the code is as it should. So tokens won't be easily unlocked at will the developer just to disrupt their tokenomic.

Suppose you set a 5 -year locking period on your smartcontract, then the market tracker refers to the indication (after the contract code is validated). The token will remain locked, the market cap will only be re-adjusted according to the current token circulating after reaching the unlock date on the smartcontract.

[Shastatimer2]

Hi again, I need a confirmation please.

let's say a project has a total supply of 1 000 000 000 tokens.
there's a public sale, and 6 000 000 tokens are sold at a price of 0.04$
So the total market cap for the public sale is 240 000$.

Let's say that, the token has now a price of 0.002$
can we infer from this that , as the price of the token has been divided by 20, it means that the amount of money in the project
has been more or less divided by 20, and that there is currently only 240000/20 = 12000$ left in the project ?
 
Thanks

[rat03gopoh]

Hi again, I need a confirmation please.

let's say a project has a total supply of 1 000 000 000 tokens.
there's a public sale, and 6 000 000 tokens are sold at a price of 0.04$
So the total market cap for the public sale is 240 000$.

Yes,

Let's say that, the token has now a price of 0.002$
can we infer from this that , as the price of the token has been divided by 20, it means that the amount of money in the project
has been more or less divided by 20, and that there is currently only 240000/20 = 12000$ left in the project ?
 
Thanks

Yes, but it only reflects the total capital of 6 000 000 tokens even though there are eg 500 000 000 in circulation.
Again, the market cap doesm't cover all the total supply, but is based on tokens in circulation after going through the trading process. Because that's the only way a token gets a value (price) which is then calculated by price tracker sites.

[bettercrypto]

First of all, op, to get the total market cap of any coins, the simple thing to do here is to find out the circulation supply of the coins and then multiply it by its current price.

     For example, if there are 10M coins and the circulation supply is 1M coins and there is a price of 1$ per coin current value will appear like this 1M x 1 = 1M (this is its market cap) but there is also something called trading volume/Marketcap the calculation is different here. And scalpers often look at it because it is important to them and there is also something called Market Dominance.

[joniboini]

Let's say that, the token has now a price of 0.002$
can we infer from this that , as the price of the token has been divided by 20, it means that the amount of money in the project
has been more or less divided by 20, and that there is currently only 240000/20 = 12000$ left in the project ?

I'm not really sure I get what you're trying to say, but I think you're mistaken in calculating the money the team gets when they do a public sale vs the value of the project itself. Most public sales participants or just buyers in general would use other currencies to buy the tokens. For simplicity's sake, let's say they use ETH. It means that at the time the sale ends, the team gets $240k in ETH. They can decide to sell some of them or keep them depending on their needs, it has no connection to the token market cap at all.

In an unlikely scenario, they might convert some of them to their own tokens, but that is almost impossible unless the team is so dumb. Almost every project will allocate some tokens to the team, so there is no incentive for them to convert those ETH to their own token. In short, the team/project is likely going to be fine in the short-medium term even if the token price plummets that hard. The buyers are the ones who got screwed.

[tvplus006]

First of all, op, to get the total market cap of any coins, the simple thing to do here is to find out the circulation supply of the coins and then multiply it by its current price.

     For example, if there are 10M coins and the circulation supply is 1M coins and there is a price of 1$ per coin current value will appear like this 1M x 1 = 1M (this is its market cap) but there is also something called trading volume/Marketcap the calculation is different here. And scalpers often look at it because it is important to them and there is also something called Market Dominance.

A very important condition for calculating market capitalization is the volume of daily trading. Otherwise, a coin that has no demand in the market, which does not have a large Circulating Supply, may even after one purchase at an inflated price, surpass the top coins in total capitalization. Thus, market capitalization does not always correctly reflect reality.

[sana54210]

First of all, op, to get the total market cap of any coins, the simple thing to do here is to find out the circulation supply of the coins and then multiply it by its current price.

     For example, if there are 10M coins and the circulation supply is 1M coins and there is a price of 1$ per coin current value will appear like this 1M x 1 = 1M (this is its market cap) but there is also something called trading volume/Marketcap the calculation is different here. And scalpers often look at it because it is important to them and there is also something called Market Dominance.

It is definitely important to know the difference, because one of them will tell you the total marketcap, while the other one will tell you the circulating marketcap and while trading that one matters more. In any case, when you are trading the price should be the only thing you care about, because if the price moves then you make a profit or make a loss and that is the important thing.

Not many people realize how important making a profit based on just movements could be and they focus on all the little details. I suggest making sure that you learn the movements by heart before you do anything else, that will definitely help you out in the long run.

[bittraffic]

It's the market that decides the price of a token. The price of A Token that is listed in all exchanges is averaged to determine the price which is listed on CMC. If one person decides the buy the token for more than $0.50 let's say $0.55, and it reflects in the orders, then that is the price of the token.

All those unlocked don't matter.  ETH has infinite supply AFAIK that doesn't mean its price will keep declining.

[GeorgeJohn]

It's the market that decides the price of a token. The price of A Token that is listed in all exchanges is averaged to determine the price which is listed on CMC. If one person decides the buy the token for more than $0.50 let's say $0.55, and it reflects in the orders, then that is the price of the token.

All those unlocked don't matter.  ETH has infinite supply AFAIK that doesn't mean its price will keep declining.

I understand your area of explanation, but in actual sense market cap just means a market capitalization, and it's what use to determine the market condition for a specific time, and it's neither the market is of in good condition or neither bad condition, breaking it down for the second time, a market cap can be referred as the nature of the market price at a given point of time. And especially for the people who are the really be concerned for the market.

[shinratensei_]

it's just as you said current coin price times the current circulating supply, if there is sudden increase in circulating supply that is unlocked coin then the market capitalization naturally will also increase and it doesn't necessarily means the current price will get decreased just because of the increase in circulating supplies, since most of the token that's gonna be unlocked are vested with careful tokenomy planning. heck, even if there's 1 mil total circulating supply and only 1 coin being sold at $1 its market capitalization still $ 1 mil it's just don't have liquidity for anyone to sell in the market, that's just how it is with these coins market capitalization calculation in general.

[Shastatimer2]

Hi guys,

Thank you very much for all your detailed answers.
I'm learning a lot , that's really helpful

Could you please explain a little bit more sana54210, what you mean when you say
"Not many people realize how important making a profit based on just movements could be and they focus on all the little details. I suggest making sure that you learn the movements by heart before you do anything else, that will definitely help you out in the long run."

Thanks.

[dansus021]

"Not many people realize how important making a profit based on just movements could be and they focus on all the little details. I suggest making sure that you learn the movements by heart before you do anything else, that will definitely help you out in the long run."

I don't really know what Sana means but you must know about circulating supply and market cap, we usually using bitcoin standard and most Shiller or people who sell token says the price of the token will reach "100$" and they talk about bullshit since they have a total supply of dozen and unlocked all so their token entered the circulating supply and the market cap value will unbelievable.

Simple like this, Bitcoin currently has $452,007,293,039 of total market cap. This is the biggest marketcap there is no way there is a token or coin that above that market cap so stay away when there is people said "A" token will reach 25K in the next year when their circulating supply is above 21 million