Why is market capitalization not a good measure for crypto-currencies? | CryptoNews

The crypto-active market generally places a premium on price in the valuation of a given project. In order to broaden this element, it has been good within the ecosystem to use market capitalization as a metric to analyze the financial health of crypto-currencies, tokens and startups of development.

However, the data offered by the market capitalization are insufficient and even imprecise, showing unrealistic data on investing in a cryptocurrency or an ecosystem-related project.

The positioning of this quote and classifications built from this measure (such as those viewable in CoinMarketCap) has become a common element of the ecosystem, presented as a way to analyze the supposed investment that A project receives. cryptoactive, although this may not be accurate in all cases.

Projects with few transactions, with malleable monetary policies, even generated by a bifurcation – with an inherited "capitalization" – are among the first places in the rankings, which shows that the value of these crypto-currencies, in terms of the market capitalization distorted the price-criptoactivo relationship as it was the traditional price-share ratio treated on the stock markets.

What is market capitalization?

Recall that the market capitalization was derived from traditional equity investments, which reflects the financial health of a firm determined by the investment it receives on the stock market.

It is an element that demonstrates the robustness of a given enterprise by a simple mathematical calculation: the number of outstanding shares of a given company is multiplied by the price at which this stock trades on the stock exchange. It's a metric that measures the size of businesses.

Market capitalization is a correlation between the value of a company and its positioning in the face of public opinion.

However, it should be noted that this measure is also affected by speculation, in particular because of changes in stock prices of companies in the short, medium and long term. In this sense, the stock market is also integrated by the expectations of achieving corporate objectives, as well as by the benefits or damages that may involve alliances, acquisitions, sales or any other type of transaction directly affecting the assets.

In any case, it should be noted that we are talking about a variable and unstable number. Their behavior depends on the price of the shares who can be assigned by the operations of the company or by external factors, such as new legislation or taxes, among others. In addition, traditional companies may be listed according to other parameters, such as "market value", which uses different factors to calculate the value of a product, service or product. ;a company.

Currently, the most capitalized companies in the market are Apple ($ 1,091 billion), Amazon ($ 976,659 million) and Microsoft ($ 877.4 billion). In the case of Apple, it is the first company to exceed $ 1 billion in market capitalization, although Amazon is very close to reaching this figure.

Why this weighting in crypto-currencies does not work

Although there are similarities between the crypto market and the stock exchanges, this measure does not reflect the value of a cryptocurrency in the same way as in the case of companies created and regulated by the authorities government. The mere multiplication of the outstanding total of a cryptoactive by its market price does not really reflect its value and may be tainted with several anomalies such as the creation of more chips or coins, the irregular movement between stock exchanges and significant capital, among others.

One point to note is that many companies established in the traditional financial system – in which the metric of market capitalization works best – have defined business sectors. Although the usefulness, usability and future of many crypto-currencies belonging to the current market remain in question. Expectations and projections deprive themselves above their real price, so that speculation and volatility are more pronounced.

Given the relationship between the market capitalization of a cryptocurrency and the number of currencies in circulation and their price and the possibility in some projects to increase at will, this total can easily manipulate the market capitalization to give a impression. Positive and robust project.

Another important element to take into account the inadequacy of the figure is that data on the circulation of cryptocurrenciesthey do not usually consider those who can not move. The circulating total of a cryptocurrency is not necessarily the amount that can be mobilized, which means that the price of moving parts could be higher or lower than that reflected in the market, depending on the consideration of its users. investors

Even in the case of a cryptocurrency or a token with few users and transactions, who develop and maintain their protocol, they can increase the number of tokens in circulation by moving funds from their personal purses or from the treasure of the company to trading desks. implies greater ease of use or decentralization of crypto-active activities. This type of movement increases the market capitalization although it does not mean more development, adoption or increase in the value of the project.

Some projects such as TRON, Ripple, Cardano or EOS have directly influenced the increase in their market capitalization since the creation or diffusion of larger amounts of crypto assets during certain periods. Others, such as Bitcoin Cash "inherited" its Bitcoin capitalization, constituting a difficult forking of the first blockchain.

Something similar happens in the case of Bitcoin Cash, which resulted in two competing channels: Bitcoin Cash ABC and Satoshi Vision. Even in the absence of any relationship with the main channel, each fork takes part of the market capitalization of its original chain, in terms of the price expectations of buyers or potential users, without this necessarily implies an investment contribution. to the project.

Some options

There are some options for developing a metric that reflects this investment, but is more suitable for the cryptocurrency market. This is the case of the Willy Woo and Nic Maps proposals, two indices created by these ecosystem specialists to better serve the dynamics of the cryptocurrency market and its investors.

NVT is an index designed by Willy Woo. This index measures the market value of BTC between daily trading volume in USD. This metric always takes into account the market capitalization but divides this figure by the daily volume of dollars in circulation in the blockchain.

"It's technically an expression of the reverse monetary speed," one reads on Woo's website. The analyzed data come from Blockchain.com.