With the current hype and rise of many altcoins lately in the cryptocurrency space, we need to slow down to look at how different metrics, including market capitalization, or market cap, can impact the long term market prices of a cryptocurrency.
We are seeing it rampant in social media groups and telegram where people are hunting for anything less than $0.01 because they feel it is guaranteed to at least double their money if it goes up to $0.02. While technically this is true if it happens, there are many factors that can impact your ability to realize a profit like that.
Understanding how the market cap can play a role in the valuation of a cryptocurrency is important for all, but especially if you are looking to hold a cryptocurrency for a substantial amount of time before trading it.
To start, let us start by looking at market capitalization, or market cap. Market cap is determined by multiplying the number of coins or tokens of a cryptocurrency that are created by the current market price of that cryptocurrency.
The higher the circulating supply of a cryptocurrency is less scarce an asset is and means it could have a much lower market price. For example, at the time of this writing, XRP market value is at $0.93 and has a market cap of over $43 billion, while Polkadot market value is $40.53 and has a market cap of $40 billion. Even though most think XRP is a much better value, XRP has 46 billion coins in circulation and another 54 billion coins in reserves that is not counted in market cap.
Polkadot has 481 million coins in circulation with only about 80 million extra not in circulation. You would say that Polkadot is more scarce and why even though they are close in total market cap value, many uneducated look at XRP and think it has a better chance of big gains solely off of looking at the current trading price.
This is why many who understand the market laugh when someone says a cryptocurrency like XRP or one with similar supply will hit hundreds or even thousands of dollars. Could it give you great profitable returns from trading or investing?
Absolutely, but you must understand this to have realistic expectations. While the disclaimer here is that it is possible for markets to increase drastically without regard in the short term for market cap, the only way that this is sustainable over time is if there are sound tokenomics around the project as well. Without any fundamental base for massive price increases, most suffer the fate of what is known as a pump and dump, which is where a price rises dramatically but then crashes almost equally as drastic. The takeaway from this so far is do not base your trading or investing decision off of the fact that you think a cryptocurrency looks cheap in price without taking other factors into account. So many cryptocurrencies from 2017 that were selling for a fraction of a penny are now basically dead due to lack of fundamentals.
Now let’s take a look at tokenomics as these factors can also influence a price. There are so many factors that influence market price movements that it is impossible to cover them all here, but understanding how market cap and tokenomics play a role in it are important for you to make better investing and trading decisions. Market cap is a part of tokenomics, but I felt it was important enough to have its own section above. Total supply is one of the first things to look at.
This data can be found on Newscrypto.io. Basically this helps you gauge the relationship between the supply and the demand of a coin or token. When looking at total supply, you may notice a difference in circulating supply. It could be that some have not been mined yet, but are predetermined to be released over time. Some may be locked in an escrow or smart contract that removes them from circulation. And also, some may have been proven to have been lost, burned, or deleted.
Next it is important to understand how that cryptocurrency is being used or is planned to be used. Is there a strong chance for adoption and massive use for this cryptocurrency? If the answer is yes, growing demand and a set or fixed supply means you could see value increase. Token distribution is also important to identify as in how will or are the tokens distributed or being distributed.
If one entity continues to control a majority of tokens as price and adoption grows, you could see them being able to manipulate the market by large sell orders being executed. Cryptocurrency data on sites like CoinGecko link you to a block explorer that will allow you to look at how a coin or token is distributed among all of its wallets.
While a fairly new project may not have much distribution in the terms of wallet holders, there should be some roadmap to get there. One last aspect of tokenomics to look at is the potential for future adaption. As this technology evolves, the team needs to be able to adapt with it. Although the development team is decentralized, having a consensus of developers to continue to build and adapt a project as needed is important for long term success.
Hype and attention can temporarily pump up a cryptocurrency’s price like we have seen recently with Dogecoin. However, the development on that project has not really been touched since 2014. Now, anyone can band together with others to change that, but at the moment, that is one thing that will prevent something in that instance from being a good long term investment. Many projects that are currently in the cryptocurrency space are just in the very beginning stages of growing and evolving towards wide spread adoption.
Many projects will not make it, while a few will become widely adopted. Some may be limited to a certain sector or industry for adoption, while others could be widely used in many aspects of a bustling economy. There is risk with all of them and you must understand the risks you are taking. Having a sound understanding of how tokenomics and market cap work can help you make better, more realistic decisions for your investing and trading.