The problem is the use of market cap as a valuation metric. It is absurd to think that your joke cryptocurrency is actually worth $2B just because one person was willing to trade at a price that implies $2B.
To show the absurdity, consider the people who buy used cooking oil from restaurants to turn into biodiesel for their modified 1975 mercedes 300D. They might pay $2/gallon for that used cooking oil. Would it be reasonable to assume that the market size of used cooking oil is now $2 * (Gallons of used cooking oil produced yearly)? No, that's absurd. Someone paid a high price for it, that doesn't mean everybody did or will.
> The problem is the use of market cap as a valuation metric
The currency analog to market cap is money supply [1]. It's a specialized term with less general utility than market cap for equities.
Market cap is a useful statistic because when it comes to shares, the whole is worth more than the sum of its parts. If you buy every share of Apple stock outstanding, you own a business throwing off $60 billion a year [2]. If you buy every Bitcoin in existence, you have nothing of value.
That said, the quoting of crypto market caps is a symptom. Nobody knows what these things are useful for. Dimensionalising the price is better than simply quoting a number. But you can't measure what you haven't defined.
No, money supply is a pure count. Money supply is not quoted in terms of trade, it exists purely outside of market behavior.
Market cap requires a trade market in order for it to be calculated. It is money supply x last trade price. That's why you quote a cryptocurrency's market cap in some other currency, whereas a market cap is quoted in terms of itself.
> Money supply is not quoted in terms of trade, it exists purely outside of market behavior
FX traders absolutely look at money supply, amongst other things, re-priced into hard currency when considering e.g. foreign-currency debt burdens; local rates, inflation and borrowing conditions; and the monetary policy relative to the internal and export-oriented economy. It's a specialist metric, though.
The money supply isn't the currency's value. Of course it is a factor in what traders are willing to pay to acquire it...but weather can be as well. Do you conflate the trade balance with the value of a currency too?
Market cap is money supply * last trade price. It mathematically can't be analog to money supply, any more than density can be analog to mass.
As in take the outstanding money supply and convert it, at prevailing rates, to U.S. dollars and look at that statistic over time. It’s a crappy metric, but it is useful in limited situations, e.g. when pricing rate or FX swaps.
Both market cap and money supply are metrics that sum across the set. In America we can just count dollars, because our unit of account is our currency. For countries with FX sensitivities, however, that sum is less meaningful in domestic currency than as a hard currency value.
And what if 90% of that market consensus is really just 10 different high frequency traders battling for top market making position, with the occasional humdrum buying to "diversify"?
The market depth says a lot more about a currency's value than the market price or even volume does. It's not something that can be summed up into a tidy single number, though. Which means people don't talk about it when when writing glorified blog posts.
This would imply that all cryptos are handled by 10
bots, which isn't the case. Coinbase added 1 million users in June last year, and that's just one exchange, so think if
crypto owners approximating 100 million people. They sure also buy cryptos, not only
bots.
To show the absurdity, consider the people who buy used cooking oil from restaurants to turn into biodiesel for their modified 1975 mercedes 300D. They might pay $2/gallon for that used cooking oil. Would it be reasonable to assume that the market size of used cooking oil is now $2 * (Gallons of used cooking oil produced yearly)? No, that's absurd. Someone paid a high price for it, that doesn't mean everybody did or will.