How to measure the value of digital currency? Market capitalization may lie

In order to measure the development and value of digital currencies, most people will go to websites such as CoinMarketCap or CoinCap.io to check the specific market value. The market value of a digital currency is a string of numbers obtained by multiplying the total supply of the currency by the current market price. Although no currency can currently shake the position of Bitcoin, it is still quite interesting to study the top ten digital currencies by market value.

Although market capitalization can provide us with rich data, it is far from enough to rely solely on market capitalization to study digital currencies. In the comparison of the advantages and disadvantages of digital currencies, there are many data that need to be considered, and sometimes market capitalization can be deceptive.

Market value deception

When certain coins cannot be traded or circulated in the market, the market value of such digital currency is misleading. Usually this problem only occurs预挖矿coins, and the probability of this happening is relatively small.

The best example of a pre-mine that led to a crazy market cap is Auroracoin. A few years ago, this altcoin announced that its market cap had exceeded $1 billion, but in fact most of the coins were not traded. At that time, the market cap of Auroracoin that was eligible for trading was only around $10 million.

Today, the market value of Auroracoin has just exceeded 1 million US dollars.

Ripple’s token XRP is another asset that has been accused of being overvalued, as Ripple itself holds the majority of XRP on the market. Many people believe that Ripple’s system is a private ledger rather than a digital cash system. Therefore, it is unclear whether the comparison between Ripple and Bitcoin or other altcoins is valid.

Steem is another digital currency that has seen a sharp rise in market value recently. Due to its Steem Power mechanism, a large amount of Steem is currently locked and cannot be traded. The latest issued Steem cannot be withdrawn or resold immediately. In July this year, the market value of Steem was as high as $400 million, but now it has fallen to $40 million.

Earlier this year, Vinny Lingham, CEO of digital identity security company Civic, wrote in a blog post that lost digital currencies should also be included in market capitalization calculations. Indeed, Bitcoin's market capitalization is calculated in this way, but at least 4 million coins are not in circulation in the market. They are either "burned", lost, confiscated by governments, or are missing (Satoshi Nakamoto holds at least 1 million Bitcoins).

Liquidity is important

There is no doubt that the calculation method of the digital currency market value is problematic. Fortunately, we can still evaluate the value of digital currency through other data.

Veteran Bitcoin investor Trace Mayer said in a recent Bitcoin Report show:

There are two main factors (in assessing the value of a digital currency). One is market capitalization, and the other is liquidity. How many transactions are being processed per day? If you were to sell $50 million worth of ether, would the market be able to handle that in one day?

Mayer went on to say that a sudden sell-off of a large amount of Bitcoin could cause a price fluctuation of a few dollars, but not all digital currencies would behave the same way as Bitcoin.

A high market capitalization does not mean strong liquidity.

Mayer also mentioned the factors that determine currency liquidity in addition to traditional digital currency exchanges. Unlike other competing coins, Bitcoin has real users who do not just use this digital currency for speculation. Some merchants accept Bitcoin payments, some people's wages are in Bitcoin, and P2P transactions often occur outside of exchanges. The performance of Bitcoin liquidity is not just for pure speculation.

Bitcoin's market capitalization is similar to that of small and mid-cap stocks, but it has the liquidity of large-cap stocks.

Among the smaller projects like ETH, Dash, and Steem, Steem is a relatively interesting experiment, but the trading volume of this coin is not large. If you sell $5 million worth of Steem at once, it may cause the price of this coin to plummet or even return to zero. But this will never happen to Bitcoin.

Bitcoin ETFs

In Mayer's view, once the multiple Bitcoin exchange-traded funds (ETFs) currently under review by the U.S. Securities and Exchange Commission (SEC) are approved, they are likely to bring higher liquidity to Bitcoin.

I haven’t seen any project that has the same high liquidity as Bitcoin yet - not to mention security and other aspects.

When asked why the Winklevoss twins’ ETF has not yet been approved, Mayer responded:

Pricing Bitcoin is a big problem.

Mayer believes that the recent launch of the Bitcoin Price Index by the Chicago Mercantile Exchange Group (CME Group), the world's largest futures exchange operator, is one of the evidences that the Bitcoin ETF will soon be passed, because the Bitcoin spot price established by CME as a credible traditional financial institution is more likely to gain mainstream credibility.