The problem with crypto market capitalizations
The problem with crypto market capitalizations
- "As soon as the speculative zeal walks, the market capitalization often tend to fall strongly," a crypto manager told Blockworks
- Developer activity, dapp use, user growth and the number of active wallets are better indicators for strength
The market capitalization in crypto world can be a misleading value indicator, and industry observers say that metrics such as user growth and developer activity should be more weight.
The market capitalization of a cryptoasset is calculated by multiplied the number of tokens or coins in circulation by the current market price of a single unit. The metric is often used - but perhaps wrongly - to evaluate the performance of a cryptocurrency and its value.
It is true that the higher the price, the higher the market capitalization of the corresponding cryptocurrency, but they do not take into account token blocking times or supplies that are held by corporate insiders.
In the traditional financial world, market capitalization certainly has great importance. This is simply because you represent the market value of equity in dollars, which means that investors can weigh the profitability of a company instead of orienting yourself to the sales figures.
A problem with the metric unique for crypto is that lost tokens are at the end of the market value instead of being deducted from the offer. For example, around 20% of the current offer on bitcoins or 140 billion etc. Or put in neglected wallets. Should lost tokens be taken into account in relation to the current value of the residue?
growth, use of the protocol are better indicators for the cryptoma market
To be more closely considered the circulating market capitalizations, instead of Fully thinned can according to Oskari, the growth leader of TOKEN Terminal, be deceptive.
"This is a metric that views many investors into account without blocked tokens, vesting time plans, etc.
Tempakka believes that searching for developer documents and white papers to estimate token activation could have a major impact on the price of a single tokens. He added that many investors were not even struggling to check market capitalizations and instead make decisions based on the price of a single tokens.
more valuable indicators, he says, are the service a specific project provided there, how much use it sees and how much fee income generates the service.
"The most important indicator for the value of your protocol is a fundamental analysis of what happens under the hood from a business perspective," said Tempakka. "The more organic growth and use you have and the more active user growth you have, the higher the evaluation of a protocol from a fundamental point of view."
volatility during market cycles
Market capitalization numbers can also fluctuate greatly during bear and housese cycles due to the changing market mood and no deeper insights such as transaction volume, number of users or activity in the network.
"On bull markets you often see that protocols are exploding due to speculation. But as soon as the speculative passion decreases, the market capitalization often tend to fall strongly," Daryl Kelly, founder of the NFT platform Ltd.inc, told Blockworks. So this metric explains very little about whether people like to use the crypto protocol in question, including a certain defi or meta-verse project, he added.
blockchain developer numbers are another good metric
Kelly believes that developer activity is a more useful indicator of the strength of a crypto or a project.
"Just look at Ethereum and Solana. The amount of developer activities in these networks is immense and continues to increase," he said, adding that this criterion indicates sufficient demand from users in these blockchains in order to develop more applications for everything from Defi and NFTS to crypto games.
a State of Crypto-report In May shows that Ethereum has made it, 4,000 monthly developers And to clearly exceed the other protocols.
Santiago Portela, CEO of Fitchin, agreed that market capitalization is a faulty metric, and pointed out that Solana's strength of the blockchain did not reflect.
From a price perspective, Solana could be perceived as poorly cutting. But it is a different story when you look at the volume of the NFTS that are processed on the blockchain. This month, the commercial volumes reached their climax on Solana-based marketplaces such as Magic Eden and Metaplex"It tells me that acceptance in this network increases and that there are builders behind it - in fact these are the key aspects to really understand the strength and resilience of the ecosystem," he said.
But not everyone believes that market capitalization is a weak measure. Nischhal Shetty, CEO of the Indian crypto exchange Wazirx, said you could be a helpful instrument to assess the strength of different protocols. But he agrees that the hype can cause market capitalization for obscure protocols during bull markets beyond the benefits they offer.
more reliable metrics - in addition to the number of developers - are user growth, the number of active wallets and the use of DAPP (decentralized apps).
"One reason for the success of Ethereum is that it has a large number of applications based on it, which in turn attract users. And this user growth also attracts more developers. In this case, you have a positive cycle in which developer activity and user growth nourish each other. Therefore I think it is important to take a look beyond the hype, including market capitalization," said he.
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The contribution the problem with crypto market caps is not a financial advice.