Many of us have heard about the cryptocurrency market capitalization. Also, many of you probably paid attention to the news headlines from the category "Bitcoin lost 10% of the capitalization for the day," and you probably had the idea of the importance of this factor. But what is it?
The main thing is that the cryptocurrency capitalization has its own peculiarities. In what its difference and how competently to use indicators of capitalization in trade and investment - we will try to understand.
Formally, of the cryptocurrency capitalization is calculated by multiplying the total number of tokens by the rate of one coin (for example, to the US dollar). Then the capitalization of the token, which was issued in the amount of 1 billion, and is worth 1 dollar on the exchange, will be $ 1 billion. Similarly, the capitalization of companies whose shares are traded in the stock market or other securities is also calculated. However, in fact, these indicators differ, and this is due, to a large extent, to the specificity of crypto markets.
A specific number of shares is always traded on the stock exchange. In addition, it is almost always known who owns the remaining shares. The asset is liquid and controlled, and the possibilities of manipulation are limited. Therefore, the capitalization of the company, calculated through the shares, can be considered as objective as possible. If the stock price drops sharply, which will lead to a decrease in capitalization - there are always reports on the assets owned by the company (real estate, capital goods, etc.).
As soon as it becomes clear that the company's market capitalization is lower than the cumulative estimated value of all assets owned by the company, the share price will immediately soar, as it becomes clear that they are "undervalued".
This strategy is not applicable to cryptocurrency. This is because the majority of cryptocurrencies do not have any tangible added value. Even in the case when the cryptocurrency supports a valuable and popular product (for example, smart contracts and the entire system of the Etherium), it is impossible to give an objective assessment of it. As a result, the only way to calculate market capitalization is to multiply the price of the token by their total number.
There are several reasons why such a capitalization will not be objective enough and build a trading strategy on it is illogical.
First, most companies "hold" a certain percentage of tokens (sometimes more than 50%) for their own purposes, releasing only part of them for open sale. Of this amount, not all tokens can be bought out, and some more will be postponed by positional investors in the "long box".
Secondly, the very mechanism of the crypto currency implies that most of the assets will not be traded on exchanges, but will remain "in the hands" of investors as a long-term investment.
As a result, it turns out that to rely on standard indications of cryptocurrency market capitalization, on sites like coinmarketcap.com is not only pointless, but it can be dangerous for a trader.