The only thing we can use market cap for in crypto is to compare risk vs reward of alt coins to Bitcoin and even that has its limitations. Hear me out.
Market cap is dependent on price, not the other way around. So, where does price come from in crypto? From sentiment and majority opinion that gets translated into sell and buy orders. In crypto, that’s basically it. There are no balance sheets, P/E ratios and we don’t really know the actual circulating supply (float) of any cryptocurrency due to lost keys, forgotten wallets, wrapped coins and tokens, and many other factors.
Cryptocurrency market cap surpasses Italy’s market cap.
Bitcoin’s market cap is higher than Visa’s market cap
These types of comparisons are very misleading. Market cap in crypto is basically just a solution to a math problem that has some questionable inputs. They are Circulating supply (which we don’t really know) and price (which is just the price of the coin during the last executed transaction between a buyer and a seller that placed orders). Market cap is not a measure of how much money is invested in a coin or in crypto in general, not even close in most cases. Italy’s GDP and Vis’s market cap are based on actual figures that are not arbitrary. While prices in traditional markets are also reflections of the last traded price, we can use various markers to determine the future value of a traditional company.
Let me repeat that.
Market Cap is not a measure of how much money is invested into an asset.
Let’s all scoff at shitcoins together for a minute while I further ruin market cap for you. Create a token with 5,000,000,000,000 coins, provide some liquidity on a swap, and make a trade at at $.000001 and now you have a coin with a $5,000,000 market cap. Presto! Look at this gem!
Low volume, relative to other markets, is a hallmark of cryptocurrency. Low volume creates volatility because the spreads are wider, in other words, there’s a wide range in price between buy orders and sell orders. This is significant because it means the slightest bit of bad news can change sentiment quickly and cause high sell pressure. It also means that good news can create good sentiment and a growing imbalance in buying pressure can cause price to skyrocket.
Where’d this last $1 trillion dollars come from? Who are the whales?
It doesn’t take a whale and there wasn’t an inflow of $1 trillion. It’s imbalances in buying pressure and selling pressure that move price. Most importantly, shifting sentiment and the cancellation of existing buy/sell orders and undercutting buy and sell orders can cause massive shifts in price with small amounts of money. It’s not a large inflow or outflow of money entering or exiting the market. Remember when that news came out and you went and canceled your buy orders and set a stop loss? We are the whales.
What about supply? It only matters in the beginning. Some coins have an ICO or Pre mine event where the price is created either privately with no explanation or determined by the amount invested and the circulating supply. Once it hits the open market, the price is what someone is willing to pay if there’s a seller on the other end. After it trades for a while price is somewhat established, after that, well, inflation and deflation don’t matter as much unless it’s a very popular coin or the increase or decrease in supply is a massive amount in a short time frame.
That’ll be part two because this got long.
Tl:DR: Bitcoin passing Visa’s market cap (or insert any cryptocurrency and any other publicly traded company) is misleading and doesn’t really mean a whole lot. In crypto, the only application for Market cap is using it to measure risk against Bitcoin, and arguably, Ethereum.
Edit: I’m not saying to ignore market cap. It doesn’t mean the same thing in crypto as it does to anything else. Just like the term “cryptocurrency” doesn’t describe this space anymore, “market cap” doesn’t describe in crypto what we associate it with outside of crypto.
There’s no comparison to publicly traded companies, countries or anything else, not even fiat and forex markets. Use crypto market cap to compare crypto to Bitcoin unless it’s a new crypto, then the comparisons fall apart.
