Market Cap is a well-known indicator for fans of cryptocurrency and financial markets in general. It is regularly used to judge the bullish potential of a cryptocurrency, yet it is in doubt. between benefit Unfounded Correct Beliefs, Overview of indicator Value for the strict investor.
Market Capital: Definition and Interest
As with other assets, a cryptocurrency investor will always be interested in tools and indicators to measure their values. This value is essential because it makes it possible to determine the prospects for development, whether they are positive When the cryptocurrency is undervalued or Denial When overrated.
It is in this context that market value or market capitalization attracts their attention. It is the result of two characteristics common to all cryptocurrencies: price and the number of units in circulation.
Perhaps the simplicity of this calculation explains why market capitalization has attracted so much attention. It is easily identifiable for each cryptocurrency, allowing it to be classified and categorized. This is his preferred approach CoinMarketCap And Queen Gekkotwo reference sites for information about the cryptocurrency market.
The various characteristics are generally related to the size of the market capitalization. In general, cryptocurrency with low market capitalization presents risks volatility More important than offshore cryptocurrency for market capitalization. If the investment in the latter is therefore considered a More careful strategythe potential for an upward trend is lower.
Ethereum vs. Phantom (FTM)
Take for example two cryptocurrencies: Ethereum (ETH) and Fantom (FTM). ETH, as of December 2, 2021, is ranked second in terms of market capitalization in this sector at $536 billion, with FTM at number 40 with a value of $5.3 billion. Thus, ETH has a market capitalization 100 times higher to that of FTM. By maintaining the same number of units in circulation, the market capitalization of ETH must increase by $530 billion in order to double its price. FTM’s market cap should only increase by “only” $5.3 billion…
Also, monitoring the Market Cap makes it possible to disentangle the idea of a cryptocurrency with a low price It will have higher potential than those with higher prices. In fact, at equal market capitalization, a cryptocurrency with a very large number of units in circulation will have a lower price than another, without affecting its bullish potential.
VeChain (VET) vs. Internet Computer (ICP)
Now let’s take the example of VeChain (VET) and Internet Computer (ICP), two cryptocurrencies that have almost equal market capitalization: ± 7.3 billion dollars. The VET, on the other hand, is priced at $0.11 compared to the $40 ICP. This difference is explained by the number of units in circulation, which is 350 times For the vet. Thus, despite these price differences, their upward potential with respect to market capitalization alone is quite similar.
Market Cap: Limited Index
While market capitalization can be useful as a comparison tool within the same asset class, it is nonetheless limited. The error is among other things in its two components: the price and the number of units traded.
Price first and foremost It is only to meet supply and demand at a time T. For example, imagine that Alice makes her first cryptocurrency transaction with Bob, at a price of $10. Does this really allow us to judge the value of this cryptocurrency? of course not. Thus, the importance of market value depends on the “quality” of the price, i.e. the sound Available supply and demand: Liquidity.
Moreover, contrary to popular belief, the market capitalization of cryptocurrency is not equal to the amount of money being pumped in. When the market value drops for example by $10 billion, this does not mean that those $10 billion have left the market. So it is difficult to associate the concept of value with it.
Let’s take an example of a cryptocurrency X whose price is $10 and the number of units in circulation is 1000. So the market capitalization of this cryptocurrency is 10 x 1000 units = $10,000.
Alice, who owns 100 units of cryptocurrency X, decides to sell it to Bob at a unit price of $20. The value of this trade is 20 x 100 units = $2000. The new market cap for X cryptocurrency is 20 x 1,000 units = $20,000.
Thus, trading $2000 allowed the market capitalization to increase by $10,000.
Then the number of regularly traded units varies according to Icons (Token Economy) linked to a cryptocurrency. This Tokenomics is specific to each project and can include differentiated cash issuance, distribution mechanisms, and scarcity. Assessment of the bullish potential of the cryptocurrency thanks to distorted market capitalization, and the future development of the number of units in circulation is neglected in favor of appreciation at a particular point in time.
Further, by taking into account all the units traded in its account, The market value does not exclude permanently lost units After the loss of the private key or after the death of its owner. However, it will not be traded again. A study published in April 2021, for example, established that the number of bitcoins in actual circulation will never exceed 14 million, as opposed to the 21 million initially planned by the protocol.
Finally, the market value is clearly not an indicator to judge basic quality From the project, the innovation brought in, the developers involved, the loyalty of the community, etc. These are all factors on which the bullish potential of the cryptocurrency also depends.
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Market capital: a self-fulfilling prophecy?
Looking for a metric to estimate the bullish potential of a cryptocurrency causes even an educated investor to sometimes forget an essential element: irrationality.
If the majority of investors believe that they have found the Market Cap to be a reliable estimate of the value of a cryptocurrency, wouldn’t they end up right? Using this indicator daily to judge the potential of a cryptocurrency, wouldn’t they end up giving it a real benefit, like a self-fulfilling prophecy?
Self-fulfilling prophecies are especially destined to occur in an environment such as the financial environment, where the psyche of individuals and speculation confront each other. A factor that cannot be overlooked.
Thus, if the capital market is such a limited indicator that an equation like the bullish probability equation for a cryptocurrency cannot be solved on its own, it is nonetheless interesting within an asset class that responds to the same coins and tokens. And while the markets have been somewhat shaken over the past few days, continue to do your part as a smart investor by reviewing – precaution – The ten basic rules for preparing a bear market.
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