10-06-2021, 09:49 PM
Common misconceptions about market cap.
<!-- SC_OFF --><div class="md"><p>I see it too often in comments about market cap, either people overestimating what it means, or underestimating it. In either case, misunderstanding how it works and what it really means.</p> <h1>The Myth</h1> <p>Here's some of the misconceptions I see the most:</p> <p>-If a market cap is at $1Trillion, that means it took $1Trillion to get to this point. That's incorrect.</p> <p>-To raise a market cap by another $100 million, it means you need $100 million of money coming in. That's incorrect.</p> <p>-Market cap determines the value of that market. That's incorrect.</p> <p>-On the other side of it, I see people say that their high market cap $2 ADA coin could go to $100. Which would make them four times Bitcoin's market cap. That's unlikely to happen.</p> <h1>How it works</h1> <p>A market cap is not based on buy orders, how much money comes in, or anything to do with cash flow.</p> <p>It's simply a formula calculating (total shares) x (price of shares).</p> <p>Yes, it really is as stupid as that. There's no other element taken into account.</p> <p>Latest price is the key. If there's a lot of shares bought for dirt cheap, but the last buy order decided that the price would be $1M per share, then the market cap could become astronomical.</p> <p>Or you could have only 1 person buy a share and no one else, and pay $1M. If there's 1 million shares, the market cap would be $1Trillion.</p> <p>For a company and its stock, market cap does still make some sense. But applying that same principle on a coin, may not make as much sense.</p> <p>In crypto, it's the circulating supply multiplied by the current market price of the coin...based on fiat. This gets a little muddy as you have coins mined or issued, different caps on supply, very volatile volume, and you are pegging a currency to another currency.</p> <p>To the point where you have to question if it even makes any sense to look at market caps for crypto.</p> <h1>Example</h1> <p>One more extreme example I like to use are Moons. Earlier this year, Moons were hovering around $0.10. Until someone placed an order worth only around $15,000. Because of the ridiculously low volume and small market, the price spiked above $0.30. That was a market cap increase of over $10 Million.</p> <p>But there was never $10M involved in any way. Depending on the volume, and the action of the market, you can increase the market cap of a coin without even that much money.</p> <p>So yea, it's not completely impossible in theory for some shitcoin to match Bitcoin's market cap on a fluke. It's still very unlikely. But we have seen how ridiculously high ICP jumped out of nowhere in market cap within days, into the top 10.</p> <p>It's also not inconceivable for Bitcoin to reach prices in the hundreds of thousands. You wouldn't actually need entire nations GDP to push the price that high.</p> <h1>How to use market caps</h1> <p>On its own, market caps in crypto don't mean that much, but you can still make some use of them if you combine that data with other data.</p> <p>You have to take into account other elements, like trading volume of a coin, minting and supply limits, some of the tokenomics like burning, etc...</p> <p>And market cap should really be considered relative to other coins, preferably of similar tokenomics and appealing to a similar market.</p> <p>And more importantly, be compared within cryptocurrency. Comparing the market cap of a coin to the market cap of a stock becomes very meaningless.</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/fan_of_hakiksexydays"> /u/fan_of_hakiksexydays </a> <br/> <span><a href="https://www.reddit.com/r/CryptoCurrency/comments/q2l7b0/common_misconceptions_about_market_cap/">[link]</a></span> <span><a href="https://www.reddit.com/r/CryptoCurrency/comments/q2l7b0/common_misconceptions_about_market_cap/">[comments]</a></span>Kind Regards R
<!-- SC_OFF --><div class="md"><p>I see it too often in comments about market cap, either people overestimating what it means, or underestimating it. In either case, misunderstanding how it works and what it really means.</p> <h1>The Myth</h1> <p>Here's some of the misconceptions I see the most:</p> <p>-If a market cap is at $1Trillion, that means it took $1Trillion to get to this point. That's incorrect.</p> <p>-To raise a market cap by another $100 million, it means you need $100 million of money coming in. That's incorrect.</p> <p>-Market cap determines the value of that market. That's incorrect.</p> <p>-On the other side of it, I see people say that their high market cap $2 ADA coin could go to $100. Which would make them four times Bitcoin's market cap. That's unlikely to happen.</p> <h1>How it works</h1> <p>A market cap is not based on buy orders, how much money comes in, or anything to do with cash flow.</p> <p>It's simply a formula calculating (total shares) x (price of shares).</p> <p>Yes, it really is as stupid as that. There's no other element taken into account.</p> <p>Latest price is the key. If there's a lot of shares bought for dirt cheap, but the last buy order decided that the price would be $1M per share, then the market cap could become astronomical.</p> <p>Or you could have only 1 person buy a share and no one else, and pay $1M. If there's 1 million shares, the market cap would be $1Trillion.</p> <p>For a company and its stock, market cap does still make some sense. But applying that same principle on a coin, may not make as much sense.</p> <p>In crypto, it's the circulating supply multiplied by the current market price of the coin...based on fiat. This gets a little muddy as you have coins mined or issued, different caps on supply, very volatile volume, and you are pegging a currency to another currency.</p> <p>To the point where you have to question if it even makes any sense to look at market caps for crypto.</p> <h1>Example</h1> <p>One more extreme example I like to use are Moons. Earlier this year, Moons were hovering around $0.10. Until someone placed an order worth only around $15,000. Because of the ridiculously low volume and small market, the price spiked above $0.30. That was a market cap increase of over $10 Million.</p> <p>But there was never $10M involved in any way. Depending on the volume, and the action of the market, you can increase the market cap of a coin without even that much money.</p> <p>So yea, it's not completely impossible in theory for some shitcoin to match Bitcoin's market cap on a fluke. It's still very unlikely. But we have seen how ridiculously high ICP jumped out of nowhere in market cap within days, into the top 10.</p> <p>It's also not inconceivable for Bitcoin to reach prices in the hundreds of thousands. You wouldn't actually need entire nations GDP to push the price that high.</p> <h1>How to use market caps</h1> <p>On its own, market caps in crypto don't mean that much, but you can still make some use of them if you combine that data with other data.</p> <p>You have to take into account other elements, like trading volume of a coin, minting and supply limits, some of the tokenomics like burning, etc...</p> <p>And market cap should really be considered relative to other coins, preferably of similar tokenomics and appealing to a similar market.</p> <p>And more importantly, be compared within cryptocurrency. Comparing the market cap of a coin to the market cap of a stock becomes very meaningless.</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/fan_of_hakiksexydays"> /u/fan_of_hakiksexydays </a> <br/> <span><a href="https://www.reddit.com/r/CryptoCurrency/comments/q2l7b0/common_misconceptions_about_market_cap/">[link]</a></span> <span><a href="https://www.reddit.com/r/CryptoCurrency/comments/q2l7b0/common_misconceptions_about_market_cap/">[comments]</a></span>Kind Regards R