Is Market Liquidity A Better Way To Rank Cryptocurrencies Than Market Capitalization?
We rank cryptos based on their market cap. This might one of those things that we accept because “that’s how things are”, but what if we changed this paradigm? According to critics, ranking them on their market cap does not do justice to popular coins that move huge volumes daily. So today, let’s examine this argument.
Using Trade Volume As Market Interest
The market cap is simply the product of calculating how much is the circulation supply of a token and its current price. It’s an easy way to measure it, but its main drawback is that it lacks any information about how liquid a certain market is. Liquidity, on the other hand, allows us to see how easily you can trade your assets, which brings us to trade volume.
Tokens with a high volume represent a token that has the interest of investors. If they did not care about it, they would not be using it. If a digital asset does not have volume, it does not have general interest and, therefore, it does not have real value. There is a high percentage of token holders, but considerably fewer buyers and sellers in most markets.
If we assume that trading volume can be a proxy for market interest, it can be interesting to compare tokens for, say, their 30-day trading volume. Our hypothesis here is that if a coin trades more of its whole market cap in volume, then its marketplace is livelier and there is interest in the asset. This allows for trading the asset quickly without risks of losing money, as the market is very volatile.
However, if you have a small trade volume, you can decide to get rid of the asset and its price might fluctuate a lot. There is the chance that you will not even have people to buy your tokens. This is far more significant for traders than numbers like the market cap. Projects with low volume can make you lose a lot of money.
Comparing The Market Cap To Trade Volume
The most established tokens would still be the same ones. Bitcoin and Ethereum have a similar trading volume in over a month than their market cap. These are active markets that have already reached a certain stability and it does not matter by which measure you analyze them. Checking lesser known tokens, however, proves interesting.
However, Rchain (RHOC), Augur (REP) and NEM have a very low liquidity. According to data, it would take full 14 months of trading to cover the market cap of RChain. Even popular projects like Ripple and Stellar have low liquidity when compared to their market caps. This can show an imbalance between brand awareness and real interest in these markets.
Is this way better? Quite frankly, yes. While price would still be more relevant than either market cap or trade volume over a month, market caps can definitely be deceiving. IOST, for instance, would be a lot more liquid than Bitcoin and Ethereum, which not a lot of people would expect. Is this the time to change the way we measure the value of tokens? Maybe it is.