Buying cheap coins in the cryptosphere, just like penny stocks, is a trend. But one needs to understand that stocks and cryptocurrencies are very different.
Just by borrowing terms like stock price or crypto price and market cap from the stock market does not make them similar.
That is why most people get carried away in confusion and aren’t able to understand the exact correlation between the market cap, supply, and price.
That’s why I will share my insights in this article which I hope prove useful for you while analyzing a coin/token before investing in it.
What Does Market Cap Mean In Crypto?
A general consensus or definition of market cap in crypto is that it is the amount of money invested in that particular coin.
For example, if Coin A’s market cap is 1 billion dollars, it is understood that it is the amount invested in it.
Well, I must say this is a misconception.
Do you think when Bitcoin reached $250 billion in market cap, 250 billion dollars were invested in it?
Of course not.
When market cap increases, the price of every coin increases and one needs to understand there is no new money coming in for the coins that are sitting in yours or anyone else’ pocket.
We arrive at a coin’s market cap by this formula:
Market Cap = Coin Price x Circulating Coin Supply
and when we rearrange this formula to this:
Coin Price= Market Cap/Circulating Coin Supply
Keeping the market cap as constant it is expected that the price of Coin A and Coin B will be high or low.
For example, let us assume that Coin A and Coin B have a market cap of 100 million but Coin A’s circulating supply is 10 million coins while that of Coin B is 100 million coins.
Now apply above formula:
Coin A’s price would be= ($ 100,000,000/ 10,000,000)= $10
Coin B’s price would be= ($ 100,000,000/ 100,000,000)= $1
So you see Coin B has started to appear cheap but one needs to understand and take into account the number of coins in circulation also.
If you ask yourself as to which is a rarer coin to find, the answer is simple – the coin with limited supply.
So, in my opinion, a pricier coin can be cheap because it is very limited in supply whereas a cheap coin can be costly because of its supply volume.
Let’s see this correlation on CoinMarkeCap:
Above is the price wise list of top 10 cryptocurrencies and their respective circulating supply. Below is the list of top 10 currencies in order of their circulating supply.
One common thing to notice is that as the circulating supply increases, price per token decreases and vice-versa.
Some places only because it is dependent upon other factors such as market confidence in that particular coin and its network effect.
Look at Tron and DASH in the two images above. Both have almost similar market caps of 1.6 and 1.8 billion dollars.
The thing to note here is that Tron’s circulating supply is 8000 times that of DASH’s supply which is about 8.3 million coins. So if you divide the price of DASH by 8000 (times), you will get the per coin value of Tron.
So what does this mean?
This means that if we keep other factors such as market cap value and varying coin supply, then we can draw actual insights. In this case 1 DASH or 8000 TRX is the same because the market values them similarly.
Now another argument that comes here is, if I have 8000 TRX it has a good chance of 10% to 50% value appreciation from $0.024 whereas DASH might not appreciate 10%- 50% easily.
But analyzing in this manner is also wrong because if market sentiments are good, DASH will only require a fraction of money to appreciate in price in comparison to TRX. It is so because DASH’s circulating supply is far less than TRX. So in the case of DASH, market forces of demand and supply will be stronger due to its rarity in supply.
The original formulas of price and market cap I told you about is a fallacy. There is no concrete way of proving that the formula gives you the correct picture at all times.
If the token supply is 1 million and market cap is $1 million you don’t need $1 million to double the token price. It is a myth. It can happen with $10,000 itself or it might not happen even with $2 million.
And the total amount of money invested in a coin is not the market cap.
Everything is determined by price and price is determined by various visible & invisible factors.
Remember this and don’t fall for other concepts as most of them are assumptions.
So that’s all from my side in this article.
Now its time to ask you guys: Do you have any other insights/info or perspective to share? Could you find any other interesting or convincing data on this? I will be happy to read your comments below.
Here are some more interesting reads I could find out while writing this article:
- Cryptoeconomics is hard: Market Cap
- Understanding of Market Cap
- Less is more in crypto: Why circulating supply matters
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