Here’s Why Cryptocurrency Market Cap is Not An Accurate Representation of a Bitcoin’s True Value
Most cryptocurrency investors regularly check financial data websites such as CoinMarketCap, CryptoCompare, and World Coin Index in order to get an idea about how their favorite digital asset project is doing.
While the market capitalization of a coin or token does give us a fair idea of how much capital may have been invested in a particular digital currency platform, it doesn’t give us the pertinent information required to make informed decisions about where to invest our hard earned money.
When the Bitcoin (BTC) protocol was introduced about a decade back, there was only one blockchain-based cryptocurrency. Other altcoin projects followed a few years later with Litecoin (LTC) launching in 2011.
San Francisco-based fintech firm, Ripple Labs’ XRP token and Jackson Palmers’ Dogecoin (DOGE) were among some of the other notable crypto projects that came after the introduction of Bitcoin, the flagship cryptocurrency.
Ethereum’s ERC-20 Token Standard Makes It Easier To Issue New Coins
However, it wasn’t until Vitalik Buterin and a number of other developers introduced Ethereum (ETH) that a large number of coins began circulating in the nascent crypto market. With the launch of Ethereum, it became almost effortless to create your own cryptocurrency. That’s because the Ethereum protocol specified the ERC-20 token standard – which is essentially a template that developers can use to conveniently issue their own cryptocurrency.
Because Ethereum greatly simplified the process of creating a digital currency, there are now literally thousands of crypto tokens in circulation. There are also several other smart contract-enabled blockchain platforms such as Waves that allow users to issue their own tokens with the click of a button and a negligible fee (in WAVES).
Crypto Financial Data Sites Launched
Due to a large number of tokens being issued (after it became a lot easier with Ethereum), there was a need for people to be able to see all the different digital assets listed and organized in a neat manner – with their respective market caps showing. This naturally led to the development and launch of crypto financial data sites such as CoinMarketCap and others (as mentioned).
Similar to how the stock market works, the market capitalization of a crypto asset can be calculated by multiplying the amount of it in circulation with the market price, or the current trading price of the crypto token. For example, if a crypto asset is trading at $1.50 and there are 1,000,000 units in circulation, then we can simply multiply both values (or numbers) to get the outstanding market cap of the coin – which would be $1.5 million in this case.
According to a recent article on Toshi Times, if 1,000,000 units of a particular cryptocurrency are issued and only one trader purchases just one unit of it for $10, then CoinMarketCap will post the market capitalization of the cryptocurrency at $1 billion (1,000,000 x $10).
Clearly, this can be misleading because the market cap does not accurately reflect how much other traders would have paid for the cryptocurrency (more or less). Moreover, if only 1 unit of said cryptocurrency has been purchased, then it’s inaccurate to report that all the other unsold units will have a net value of $1 billion.
Coins Must Go Through Approval Process Before Being Listed
It must be noted, however, that not all coins are eligible for listing on CoinMarketCap. There are some minimum requirements that cryptocurrency projects must satisfy before they are approved and supported by digital asset exchanges.
Should a coin or token be supported by recognized and established trading platforms, then CoinMarketCap’s management or other financial data sites will consider listing the cryptocurrency on their site.
When the TRON (TRX) token was launched in 2017, it had started trading at around $0.0029 per unit. At that time, TRX tokens had an average trading volume of only about $58,000. There were also 10 billion TRX in circulation – which helped Tron rank #98 on CoinMarketCap. While this in itself is concerning, a week later the number of total TRX tokens issued jumped to 40 billion.
Tron’s (TRX) Market Cap Was Greatly Exaggerated
Because of the dramatic increase in the number of tokens, the market cap of Tron surged to $109 million – as it was following a simple calculation that was pre-programmed into CoinMarketCap’s software. Because of this huge rise in market cap, Tron jumped to the 50th spot on CoinMarketCap. Later on, an additional 25 billion TRX tokens were introduced – which bumped Tron’s market cap up to $167 million with a ranking of 35th overall.
Despite a large number of coins Tron introduced into the market, the total trading volume of all TRX coins was only around $50,000 to $200,000 (at that time). This implies that CoinMarketCap appeared to be fabricating the value of Tron’s TRX tokens because of an oversimplified formula used to determine a coin’s total market value.
Must Look Beyond Market Cap When Evaluating Cryptocurrencies
Notably, Tron is not the only project whose market cap might seem to be grossly exaggerated. Other projects such as EOS and Cardano also have billions of coins in circulation. Some critics argue that this may have been done intentionally in order to artificially increase the market cap of their respective projects.
Even with Bitcoin (BTC), analysts argue that its true value may not be as high as its market cap may suggest. That’s because if you want to buy many other altcoins, you need to buy Bitcoin first, and then trade it for the particular altcoin you want to acquire. This is due to the fact that there are no fiat trading pairs for many small-cap coins.
This means you cannot use USD, British pounds (GBP), or any other fiat currency to purchase these altcoins directly. In most cases, you must first buy bitcoin and then trade it for these coins. Some argue that since these transactions are factored into bitcoin’s price, it’s not a fair representation of BTC’s real market value.
Since market cap may not be the most accurate measure of how valuable (or invaluable) a coin or token may be, it’s better to analyze other aspects of a blockchain project. For instance, it might help to read about developments related to a particular cryptocurrency and whether or not it has real-world applications.
Some other things to consider while evaluating a digital asset are whether the company or organization that developed it has managed to partner with any established businesses.
Should a project’s roadmap look promising and if it’s easy to understand how and why their cryptocurrency might add value, then only should people consider investing in a digital asset project.