What value will cryptocurrency XY get or: why market cap is BS

Everyone interested in cryptocurrency will eventually wonder what value their favourite coin will get. Then they might google what others speculate for valuation and then they will run into some market analyst perspective.

These used to be like this: "coins have no real value like shares, which are a part of a business with machines, products, buildings. Coins are just speculation without any security."

The financial analyst perspective nowadays goes something like this: "Bitcoin can't reach $100,000, Ripple/IOTA/whatever can't be $1,000" etc. The analyst usually argues by market cap: "If coin X would reach a price of $1,000/piece, they would have a total market cap of $500 trillion! This isn't possible!"

And while the analyst might be completely right that a market cap of $500 trillion isn't feasible for real industries, let alone something that exists only virtually and without any added value, here's the thing: market cap is BS.

While the financial analyst evolved from point A to point B, he forgot about point A while doing so. All cryptocurrencies are purely speculative. Prices are driven by demand and supply, or more accurately: how many coins a group of users is willing to buy at a price point and how many coins a group of users is willing to sell at a price point.

Your exchange platform might look something like this:

You see the buy orders given for a coin and the sell orders given. Any coin is worth that amount that someone owning the coin is willing to sell it. If a user put in a significant amount of sell orders for a low price, then that's the current buy price. If owners see the market developing upwards and want a higher price, then that's what is the current buy price.

But that's the point - the price a coin is currently trading times the float amount of coins given isn't it's "value", its market cap. Take Ripple, for example. We have around 40 billion coins in circulation right now at a price of $0.97. But that doesn't mean we have 39 billion dollars worth of Ripple in bound capital which would limit its potential. Many of those coins were probably bought at $0.01 or less a piece. They just grew in value through rising interest in the coin, but that value isn't "real" and isn't necessarily backed.

Financial analyst A was right: cryptocurrency is (apart from its use cases) mostly speculation. And this is why market cap can't really determine the end value of a coin, because everything in the world is worth as much as some other party is willing to pay for it. And as long as there is trust and interest in a given cryptocurrency, prices will rise. If an event leads to speculation that a price might rise significantly, people buy in and drive the price up. Which is possible for as long as people are willing to pay the current buy-in price and for as long as people offer the coin at a higher price and will still get demand for it.

The only thing market cap can really tell you is how realistic it is for investors and exchange platforms to survive a "bank run" - If a coin is priced at $500 trillion and people would suddenly want their value in real money or if prices drop and people want to get out while they can, you can be sure real currency payouts won't last for long. Exchange platforms will go bankrupt, whole banks might follow depending on their business model and involvement in cryptocurrency and if we have real bad luck, we see the next financial crisis. But for as long as flow is maintained, enjoy the ride.

Cheers,

an economist