CallMeGwei considerations

Crypto’s Misleading Market Caps

The “Cheap” Crypto Illusion

Most crypto speculators naïvely fall for the “cheap” crypto illusion at some point. They think they’ve “missed the train” when it comes to “higher priced” digital assets. They reason that it’s probably far easier for an “investment” to go from a penny to a dollar than it is to go from a dollar to a hundred dollars… Hey, I get it – sometimes it works.

These are not exactly egregiously ridiculous ideas – and, even if they were, they’re far too common to be dismissed without some explanation. Fittingly, myriad explanations can be found on any crypto forum.

For the sake of anyone who hasn’t yet encountered that useful information, briefly: the price of an individual token, by itself, isn’t particularly important. It’s misguided to compare it to other projects’ tokens with a different number of issued tokens, because, in so doing, one would be comparing different percentages of ownership between potentially dissimilar projects. The method also ignores realistic ceilings with regards to how a project could/should be reasonably valued. In short:

The quantity of tokens in existence also matters.
– & –

So do fundamentals: utility, contributors, competition, etc.

Let’s tackle that “quantity” consideration – often touted as something of great importance. Quantity multiplied by market price is referred to as the market capitalization – or, more commonly, the “market cap” – of the asset. It’s a concept that has been borrowed from the traditional finance world – and it’s handed out confidently on forums as the best way to avoid the “cheap” crypto illusion. The advice is often limited to this: don’t compare token prices… compare market caps!

Alas, with this bit of sagely sounding advice – the blind lead the blind.

The “Market” Cap Illusion

Newsflash – this isn’t traditional finance. There is very little oversight and there are very few rules (yet, if ever) in the crypto market. Market manipulation is possible in theory – and, since there is quite a bit of money at stake, almost certainly occurring in reality.

Market caps can be misleading even when they are not being deliberately tampered with – how much more so if they were to be intentionally contrived?

Wash trading is a verifiable possibility in this space – entities can sell assets to themselves. It costs them very little to do this. In traditional financial markets, this kind of trading would be illegal – for now, in crypto, it might be against some exchanges’ written policies, but it’s basically fair game. This obviously inflates transaction volumes, but it can also shape market caps. There are other issues, too, that muddy reality even more than the ability to inflate volumes.

… If no one will buy your token – then just buy it from yourself at ever-higher prices until legitimate buyers jump in due to the fear of missing out (FOMO) on what appears to be steady asset appreciation. These “pump and dumps” are relatively cheap to execute with no risk of fines or jail time, they obviously impact market caps – and they are happening.

Surprisingly, perhaps, it is just how simple of a concept market cap appears to be that allows it to so effectively mislead . Its apparent simplicity has a way of bestowing a false sense of understanding and security. Make no mistake – it shouldn’t be so reassuring.

Consider this: if ten billion tokens are created and nine billion are “locked away” – then what should be the quantity component of the market cap? The quantity currently on the open market – or the quantity that exists and might make their way to the open market at any moment? What if the amount locked away is unknown? What if the amount locked away is misrepresented? Can the quantity change in the future? Market cap is much less straightforward than it initially sounds.

The reality is that a hundred billion dollar crypto market cap doesn’t mean the public has shoveled a hundred billion dollars into a project on the open market. In the worst case, a hundred billion tokens of an asset exist – and any number of them traded for just a single dollar … possibly between dishonest parties on an unregulated exchange.

As fast as market caps can go up – they can go down. The crypto market is still illiquid compared to most other financial markets. In the best case, the current market price can only support a relatively small sell-off before prices start to “slip” considerably. Billions in market cap can (and do) evaporate precipitously.

Don’t Be Disillusioned

To recap: if token prices are taken out of context, they are misleading. If market caps are considered out of context, they, too, are misleading. The truth is that being misled is far easier than being diligent. Caveat emptor.

Luckily, for crypto investors and the world at large – the crypto market isn’t all there is to the crypto revolution. The single best way to be reliably confident in a crypto investment is neither token price nor market cap… it is education.

Understand the fundamentals of the investment. Identify the problems a project seeks to solve, consider the market for such solutions, weigh the team’s experience against obstacles to their success (including competition). Read the whitepapers and steep yourself in the communities.

People will tell you that you have to consider crypto investments differently – that the rules don’t apply here. They’re right, though not in the way they generally intend. Misinformation is rather easy to generate and much less costly in the crypto space, but fundamentals are far less easily fabricated than the market signals. Fundamentals are still a thing.

Don’t just follow the market – where you have no idea who the leader may be.
Follow the tech and teams where the genuine trailblazers are far easier to positively identify.

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