“It’s pointless and dangerous”: What’s wrong with looking at market cap when investing in crypto?

Crypto enthusiast Anthony Back explained why market cap is a pointless and even harmful valuation metric for cryptocurrency estimating. Keep in mind that traders use several alternative indicators to compare the various digital assets in the world. However, according to the author, the main parameter that is most often used to match these currencies — market capitalization — can sometimes be misleading. Let’s get to the bottom of this. 

What is market capitalization?

A coin capitalization is the market value of all coins in circulation. It is a significant indicator that shows how attractive and relevant a cryptocurrency is to invest in — the higher this parameter, the lower the volatility. In simple words, by knowing the capitalization of a coin, we can understand the potential returns and risks. This is what traders often use.

But the author disagrees with that. He is sure this metric makes no sense, is manipulated, and generates wrong values. The fact that the term continues to spread is indicative of investor laziness. Many of them are looking for an easy method to find answers to very complicated issues about the value of the network. It also means the greed of some investors, who use the term sarcastically, and the media’s voracious desire to make sensational titles.

Moreover, this metric isn’t a value. It doesn’t show the value of the firm or crypto asset you invest in. It’s a basic difference that is often missed.

“Price is what an investor is ready to pay for the digital asset, and it has nothing in coming with what he receives (that is value). Suppose that something the market is ready to get for an asset is the same as what it’s worth is a big failure,” the author says. 

Why do we need this indicator, then?

According to Anthony Back, the market capitalization shows only the last transaction price, not value, deluding many investors. Moreover, when you calculate this metric, you just multiply the cost that the previous customer paid by the circulating supply, which gives you an irrelevant number with no sense. The last transaction price is finished, then completed, all preceding manipulations have another cost, and those performed after will be priced differently.

Thus, estimating of market cap relate to a particular period. Nevertheless, it supposes all sellers, buyers, and hodlers are at the last transaction price. To estimate this parameter, a useless mission, you’d have to evaluate what investors paid and sum it up. Nevertheless, even that would be not exact and deceiving because of the circulating supply problems.

Moreover, this indicator doesn’t show how much savings have been pumped into a digital asset. In simple words, if a market cap grows or collapses by $50 million, it doesn’t mean $50 million has entered or exited from the asset.

Why is this indicator useless?

It makes no sense to compare the market capitalization of one coin or token to the market capitalization of another currency or token. Even if the market capitalization of a coin matches its value, it is still meaningless to compare it because each coin or token must be measured differently. Investors often say, “The market capitalization of X-coin is $100M, but the market capitalization of BTC is $448.59B” (at the moment of writing), so X-coin is cheap, and a great investment opportunity, or “X-coin has a market capitalization of $100M compared to BTC and ETH”.

In the author’s opinion, all the words mentioned above are empty. For some reason, no one asks the question: why is Bitcoin assigned a divine market capitalization that other cryptosystems will never be able to surpass? Yes, because, after all, market capitalization makes no sense. But even if that is not true, the market capitalization of one coin, such as Bitcoin, Ethereum, Ripple, or any other altcoin, has nothing to do with the market capitalization of another coin. Since crypto-assets are created for different market fields, customers, and goals, comparing their market capitalizations would not be very smart.

What do you think about that, guys? Which parameters do you use for your research? Please, write about it below.