Why market cap is not that important

in cryptocurrency •  2 years ago 

When comparing cryptocurrencies people tend to refer to CoinMarketCap
or CoinGecko. The ranking this sites produces are always based on the market capitalization of the different currencies.

Market cap

The market cap of a digital currency is the total coin supply multiplied by the coin's market price. The market cap is of course an intersting metric it is not the only one to consider when ranking cryptos.

Why the market cap tells not the whole truth

There are many coins where only a small fraction of the total coin supply is actually available to trade. This is often a problem with premined coins.
A famous example is Ripple's XRP token of which the company holds the most. For such coins the market cap is a missleading metric.

What to consider besides market cap

A very important factor is the liquidity of a coin. If you sell a large amount of Bitcoin this will most likely not affect the price. But if you sell a large amount of a smaller coin such as Gridcoin this will lead to a great price decay. So if you want to trade you should not only consider the market cap but also the liquidity of a coin!
The liquidity is just the amount of coins that are traded in a certain time. A higher trade volume is better because your trades are more likely not to affect the price.

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Good to see other people pointing this out. The other thing people need to remember is that "gaining" or "losing" market cap in crypto has no relationship to how much money actually "came into" or "left" the market.

Another easy way to think of market cap is that it's the amount it would take to buy out the market if the entire supply was available at the current price. Of course, as soon as anybody starts to buy or sell, the price adjusts and so does the market cap -- and the entire supply is pretty much never available.

It's an interesting metric, but I think CoinGecko's ability to easily rank by other metrics is helpful. And it's also important to remember that crypto market cap rankings are getting increasingly crowded with Ethereum ICOs, which are basically crypto-kickstarters and arguably shouldn't be listed alongside actual coins. It would be like listing stocks, commodities, and real currencies together -- the major indexes I can think of all list and trade them separately for a reason.

Agreed, in a sense you should be looking for opportunities not at the top if you are an investor, those at the top already had the massive gains, smaller coins are where the real potential lay.

  ·  last year (edited)

The volume being the actual % of market cap of that coin. Using BTC as a guide, is roughly 15% volume a day. A coin with only 1% volume would not be as near liquid.
If no one is buying then your sell or ask just sits there.