One opzicht of cryptocurrencies seems to be misleading thousands of investors every day: their astounding U$ dollar market capitalization. Wij noticed that this metric is used strenuously by investors, but there’s an elephant te the slagroom: the numbers you see are fake.
Very first of all, wij need to discuss how thesis market capitalizations are calculated, and once wij do that, you’ll instantaneously see why crypto market caps can’t be real.
After an ICO, airdrop or a fork, fresh coins emerge literally out of nowhere. Some are tokens that live ter clever contracts ter the Ethereum blockchain, others are coins that have their own blockchain, mainnets and specialized wallets. Whatever the generation process is, an X number of fresh coins now exist somewhere.
The very first thing you need to do after a coin is created, is work hard to get it listed te one of the big crypto exchanges. Normally there’s going to be a community that believes ter the fresh coins and have invested te the ICO (or some other generation process). This community can be rallied to vote for the fresh coin to be included at Binance, Bittrex and so forward.
Once accepted on a large exchange, the coin is then listed spil a trading pair. Some examples are Ethereum/Bitcoin, ADA/Bitcoin and so on (note that there won’t usually be a U$/NEWCOIN pair). This fresh trading pair now shows up just like a traditional stock market trading system, with bids, asks and a system that matches the highest bids against the lowest asks and performs a best possible trade for investors.
But unlike traditional stock markets, instead of trading U$ for stocks, you trade one crypto for another. So instead of having trading volumes measured te U$, you’ve got volume measured te pairs of cryptos.
Spil you can see, there is no meteen conversion to and from U$. The only cryptocurrencies referenced to the U$, Euro or any other major currencies, are the ones being directly bought or sold ter those local fiat currencies. And that means 99,9% Bitcoin.
So why is it all fake?
To waterput it simply, cryptocurrency market caps are fake because it is unlikely to trade most cryptos for U$. Sounds pretty demonstrable, but it isn’t.
Right now Bitcoin Specie is listed with a U$ 26 billion market cap. That sounds incredible. But if you attempt to contant (excuse the pun) spil little spil 0,1% of that amount (still a loterijlot of money), no matter how leisurely you do it, its price will tend to zero rather quickly.
Suppose you generate 1 billion tokens or coins and once they are listed on a exchange, the very first trade everzwijn performed will become the unit price. Market cap trackers will then multiply this initial price for one trade by 1 billion – and that becomes the total market cap, even however a single coin wasgoed traded.
This is an extreme example, because none of the successful coins/tokens would sustain on the very first pagina of CoinMarketCap very long if they were this powerless (and CoinMarketCap has an algorithm ter place to avoid this sort of stunt).
There is also a lotsbestemming of market self regulation te cryptos where information flows quickly and the markets adapt te real time. If a worthless coin were pumped like this, anyone who wielded it would simply dump their coins and their price would druppel instantaneously.
Bitcoin Gold is a good example of fake market cap. Spil soon spil it wasgoed forked, it wasgoed traded for U$ 479 a chunk. Since there automatically existed 16+ million BTG – because it wasgoed a fork of the main Bitcoin blockchain – multiply U$ 479 by 16+ million and you get more than U$ 8 billion market cap, even tho’ not a single U$ wasgoed traded for BTG, everzwijn. If so much spil a little percentage of BTG owners attempted to convert their coins to U$, they would be te for a bad verrassing.
It’s not a Bubble, It’s Just Inexistent Market Cap
The reference inbetween fiat currency valuation and cryptocurrencies is absolutely worthless, unless you are trading inbetween fiat and crypto. And, for 99,9% of all trading volume, that means only Bitcoin can have a fairly accurate fiat market cap.
Many analysts and market gurus are calling it a bubble.
But it’s not exactly a bubble, because there is no fiat currency at all involved ter most of this fictitious market cap. A bubble assumes people are depositing real money into something that is not worth that money. That is not the case with most cryptos – since the money never got there at all. It simply does not exist.
Granted, some ICOs have raised ems of millions of U$ te specie, therefore a fraction of their valuation can be measured te fiat. But for most cryptocurrencies there has never bot a single unit traded inbetween themselves and fiat.
It is unlikely to trade most, or any ter some cases, of this market cap for fiat. To do that you would have to trade 99% of altstem coins into Bitcoin and from Bitcoin into fiat. And by the time you did that the altcoin’s price would tend to zero.
It’s spil if the same U$ had bot counted twice, once for Bitcoin and once for the altcoin, but that U$ amount only exists for Bitcoin. Repeat this process for N altcoins and you’ve got the same U$ amount counted N times, when it only indeed exists for Bitcoin.
Ter other words, you would only know the total U$ valuation for any of the altstem coins if you were able to test how much of it could be effectively traded for U$, which is unlikely for 99% of altcoins. Spil soon spil you attempted any such test, Bitcoin valuation would skyrocket and the altcoin valuation would druppel towards zero.
No 100% accurate solution exists unless all cryptos were loosely traded for fiat, which isn’t strapped to toebijten any time soon.
Therefore, it would only be possible to estimate precise U$ market caps for the cryptoassets being traded for U$. Ter all other cases, an approximation voorwaarde be made. Especially for altcoins that are not at all traded ter fiat. Estimates should be clearly labeled spil such, not spil actual market cap.
The algorithm being used today is inappropriate. Most of them simply multiply the unit price by total supply which, spil wij’ve seen, is wrong.
Ter fact, CoinMarketCap.com has bot listing fresh coins with zero market cap for a grace period ter order to avoid such distortions and marketing stunts (like pumping a fresh coin with a little amount of volume just to get it listed on the very first pagina).
Secondly, only coins with U$, Euro or other official fiat exchanges, with reasonable trading volume, should be listed with a U$ or omschrijving fiat market cap. All other market caps are 100% fake. If there is no trade inbetween a crypto and fiat, then it is unlikely to list it with any fiat market cap whatsoever.
Crypto Market Cap is not Transitive
The fact that you can trade altcoins for Bitcoin, and that Bitcoin itself has a price te U$, does not imply that thesis altcoins magically acquire the omschrijving U$ valuation. Spil wij’ve seen, this implies the same U$ being counted twice, once for the altcoin and a 2nd time for Bitcoin or whatever crypto is actually traded for fiat.
This is clearly reflected te Bitcoin’s market dominance. There’s a reason why Bitcoin hovers around 50% market dominance, and that is because most fiat is being counted twice – once for Bitcoin and again for the altcoin.
Economists and mathematicians can very likely develop more accurate models for estimated cryptocurrency market cap, based on how much actual value flows te and out of cryptos, but certainly the way it’s done today is fully flawed.
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