Measuring Up

Difficulties in measuring the market cap of crypto assets

Measuring the true value of any disruptive technology is very hard — all the more so for a decentralized, global crypto ledger that lives in a permanent media cyclone of confusion, optimism, message manipulation, and panic. The main metrics that are relied upon for crypto assets have proven themselves unreliable — “market cap,” one of the most popular barometers for the health of the crypto space has shown itself to be deeply problematic on multiple occasions, including recently when on January 8th the market cap dropped $50BN in response to the popular price tracker CoinMarketCap removing several South Korean crypto exchanges from its books. The fact that one player can shift one of the most popular yardsticks so swiftly and dramatically suggests that the yardstick itself may be broken — or wildly misapplied.

What’s wrong with the term market cap?

Market Capitalization is the market value of a company’s outstanding shares. From a stockholder’s perspective, shares represent a portion of the company’s future income via dividends. When the company sells, the stockholder receives a part of the proceeds.

“Market cap” seeks to measure a crypto asset’s decentralized network in the same way as shares of a company. Instead of shares, it’s the number of coins multiplied by the coin’s value in the market. However, unlike companies with shares, crypto assets like Bitcoin, Ether or Ripple’s XRP are not shares and are not always tied to a business. The term market capitalization in this context reflects the expectations of the future use of the crypto coin’s decentralized network.

Bitcoin researcher and Forbes contributor, Kyle Torpey believe that these expectations are highly misleading, especially in situations where coins ‘are not easily available for trade.’ A great example is the Auroracoin, a coin targeted towards citizens of Iceland with a reported market cap of $1BN back in 2014, however, the vast majority of coins were not widely available. When they counted the coins readily available, the market cap was closer to $10M. In Bitcoin alone, there are over one million lost or forgotten coins. Vinny Lingham, CEO of Civic, a blockchain identity platform, points out that lost coins are not taken into account and should be subtracted from the total amount when calculating a digital currency’s market cap for a more accurate value.

What’s also problematic is that many crypto traders act in the belief that their crypto coins are appreciating assets. A survey by LendEDU found in a survey of 564 US Bitcoin holders that 44% planned to hold their coins for more than four years. With retail investors increasingly following this model, the supply of many crypto assets remains thin and is primarily held up in individual accounts. The market dynamic in this situation is a poor indicator of the crypto assets true value. Therefore, it would be perhaps be relatively fruitless to make comparisons between the market cap of one alt coin with the market cap of another.

Market Capitalization may be an inaccurate tool for measuring growth and underlying value. However, there is utility in its evidence of the surging social interest in crypto assets. From a total market capitalization of $16BN billion in January 2017 to $800BN by December 2017, it’s hard to miss the clear evidence of booming popularity. As time progresses, more effective metrics for the crypto space will surely be found, but at the moment, the market cap should be treated cautiously as a gauge of value.

Writing and Research by Cindy Huynh