Silly, Stupid Lists.
Why Crypto MarketCap Lists are BS
Originally published on my blog Rough Notes
Here’s a hot take:
All crypto asset price trackers currently provide silly, stupid lists.
Let me explain why.
No matter whether you get price data from CoinMarketCap, CoinGecko, CryptoCompare, CoinLib, CoinCap, the newly launched OpenMarketCap, or even your favorite exchange: you always get a simple list that ranks all kinds of crypto assets in a single list — without any distinction.¹
What’s wrong with that?
Well, basically everything. The old-world finance analogy would be to have a list that ranks stocks, currencies, commodities, bonds — and whatever financial instrument you can think of — according to their market capitalization².
I assume it’s pretty obvious that such an index would be absurd and not very useful. It might even be dangerous. By comparing apples and oranges, investors might get confused/misled to mistake one asset for another. Case in point: look at how many people still simply talk about cryptocurrency and altcoins — essentially a useless distinction in today’s heterogeneous market of diverse crypto asset types.
If you have spent some time in the crypto world, you might be implicitly aware of the fact that a token is not a token is not a token. You likely came across one of the several frameworks and taxonomies that try to categorize and cluster the various cryptographic assets — for example the Token Classification Framework I developed with my fellows at Untitled INC.
The core message of all the various frameworks is that while these tokens might be implemented in technologically similar ways, they can fulfill very different functions. The particularities depend on the specific design of the token itself as well as the protocol, network, or app in which it is used.
As a result, the source of their value often differs drastically.³
Of course, any asset’s price is eventually a function of supply and demand. But the factors we assess to value assets of different classes vary. In the case of established financial instruments like stocks or bonds, that is pretty obvious. Stock prices reflect the market’s expectation regarding the issuing company’s future growth and earnings. Bond prices (on the open market) reflect the issuer’s creditworthiness and the bond’s age-to-maturity.
However, when it comes to cryptographic assets, all nuance is lost (likely because we don’t yet accurately understand how to assess and value them). So we happily rank them in a single list, using a flawed metric. And then we say sentences like “xyz is the 123rdcoin on CoinMarketCap” as if that meant anything at all. (It doesn’t!)
All that is due to the fact that crypto assets isn’t a homogenous asset class. Here is a quickly created (and most likely incomplete) list of different crypto asset types:
- Asset Type | Description | Key Value/Price Driver
- Cryptocurrencies | store-of-value and/or medium-of-exchange cryptocurrency | price mainly reflective of economic utility (or future expectation thereof)
- Network Tokens | a token that grants owner access or right to contribute to a protocol/network/dApp | price mainly reflective of the issuing protocol’s/network’s/dapp’s adaption and utility to users (though many wanna-be network-tokens are badly designed and likely won’t achieve that)
- Payment Tokens | tokens which are used to pay for services within a network or dApp | price mainly reflective of the paid service’s value (e.g. measured in fiat currency equivalent price) (discount tokens are a mostly weird concept that broadly fits into this bucket)
- Stablecoins, fiat-collateralized | tokens that are pegged to a fiat currency | price reflective of the pegged currency, minus counterparty risk
- Stablecoins, crypto-collateralized | tokens that aim to remain stable in value and try to achieve this by (over-)collateralizing with one (or several) cryptocurrencies and monetary policies on the protocol-level | these tokens are currently a thing but there are very good reasons to be skeptical about them and their price-finding mechanism
- Coins with algorithmically controlled monetary policy (“non-collateralized stablecoins”) | self-proclaimed “stablecoins” whose protocols use monetary policy to counter market-driven price changes by adjusting supply (e.g. using “Seigniorage Shares” schemes, which are surprisingly similar to ponzi schemes) | my remark on crypto-collateralized stablecoins²
- Tokenized Securities & Assets | tokens that represent (ownership of) an asset, security or another financial instrument price mainly reflective of the “tokenized” asset’s price. Depending on details potentially with premium (e.g. for increased liquidity) or discount (e.g. for counterparty risk)
Frankly, it’s unbelievable to me that the tools on which we rely in the crypto asset market don’t differentiate between these asset types. Introducing this degree of detail strikes me as a very basic measure — but one which could go a long way. It would increase transparency, help investors (as well as anybody else for that matter) to orient themselves and, thus, represent a step towards professionalization.
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¹ The sole semi-exception is OnChainFX. While their main ranking, too, makes no distinction between the different asset types, they at least seem to be aware of the issue as they provide users with basic information about different asset classes and allow to filter by type. The output is a simplified and not very useful list but Chapeau for working on the issue at all!
² A metric that is not only flawed when it comes to crypto but essentially useless for analyzing a lot of asset classes, e.g. currencies.
³ Cynics might say that all crypto prices are driven by speculation. I wouldn’t disagree but contest that in a mature and more efficient version of the crypto market, this will no longer be the case and, thus, understanding the underlying value is critical
Originally published at roughnotes.thomaseuler.de on September 25, 2018.
