Global Jobcoin's Brief Ascent Illustrates Why Market Cap for Cryptocurrencies is Deeply Flawed
It is astonishing how easily cryptocurrencies are crossing the $1 billion market capitalization landmark. Considering current trading prices of all cryptocurrencies, there are now 25 digital coins boasting a market cap of more than $1 billion. But while in recent times, the metric has become universally accepted as a relative measure of cryptocurrency rankings, perhaps it is time to realize that it may not be the best choice.
Market capitalization, also commonly shortened to market cap, is defined as the sum of the total value of a company’s outstanding shares and all of its assets. This is how we arrive at the valuation of any publicly traded company. The situation, however, becomes more complicated when it comes to cryptocurrencies.
Firstly, there is a vast difference between owning shares of a company and a digital coin or token. Shares represent part ownership in the underlying business and rights over future profits, while tokens are free-standing with no associated assets. A cryptocurrency’s market cap is simply the product of its total supply and the price of each unit.
Cryptocurrency prices are very volatile and more directly proportional to their demand and supply at any given time. In a publicly traded company, the percentage of shares owned by the top shareholders are reported, whereas, for several cryptocurrencies, a large number of coins are controlled by a small group of wallet holders, referred to as ‘whales.’ For instance, Bloomberg reported that only 1,000 wallets owned around 40 percent of the total bitcoin in circulation – however, they did not account for exchange wallets, and hence the results are skewed somewhat.
To get around the problem of determining who owns how many bitcoin and how many addresses, BambouClub, the creator of Blocklink.info, states that we can use “the assumption that a universal Power Law applies, and that it mirrors the distribution of global financial wealth” to model the distribution of bitcoin. The results show that you need 15 bitcoin ($173,790 at the time of writing) to be in the top one percent. There could be a possibility that a small group of whales could create an artificial scarcity in cryptocurrency markets and influence price.
Global Jobcoin Pumps to Twelfth Place
Take the case of Global Jobcoin (GJC), a digital currency unheard of to most, that according to its historical trading data, had never traded above $1.00. In a remarkable turn of events, however, it hit a high of $341.65 on March 2, 2018, before settling back around $0.83 three hours later. Assuming the peak trading price was used to calculate its market cap, its intraday high would result in a market cap of $4.59 billion (for comparison, this value would place it around twelfth using current prices).
Initial ‘test’ pump and then the real pump follows for GJC
By the end of March 2, the currency was only worth $7.76 million, and on March 5, it was worth $5.96 million. Furthermore, at the time, GJC had a trading volume of less than $10,000, which is less than the price of one bitcoin, a pittance compared to other billion dollar market cap currencies. GJC’s brief ascent illustrates why considering the volume of a coin is important. The altcoin is listed on two decentralized exchanges, IDEX and Token Store, and is traded for ether (ETH).
GJC is just one of several cases among cryptocurrencies where it becomes impossible to arrive at a market value due to the high volatility of these coins. Such examples highlight why using the price and supply of a cryptocurrency is a flawed method of calculating its market cap. Nevertheless, data available at CoinMarketCap estimates that the total market capital of all traded cryptocurrencies currently sits at $465.96 billion.
A more efficient tool to analyze cryptocurrency for investment is already in place at CoinGecko and Onchainfx; these are two examples of cryptocurrency ranking sites that analyze a deeper set of factors more applicable to valuing cryptocurrencies.
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