Molly White on cryptocurrency “market caps” and notional value

Good post from Molly White discussing the topical issue of how the numbers used to describe the rise and fall of the crypto market are constructed. The post is not long and worth reading in full but here are a few extracts.

Molly starts with a bare bones outline of how the valuation numbers you read in the news are typically generated …

To get the dollar value of a pile of crypto tokens, we take the price of that cryptocurrency on an exchange and multiply it by the quantity of tokens in the pile. To get the market cap, we take the price of that cryptocurrency on an exchange and multiply it by the total number of tokens in circulation. To get the total market cap of all cryptocurrencies, we sum up all of their market caps. There are many cryptocurrency exchanges, trackers, defi platforms, and other projects out there that show the market cap of various tokens. Each of them calculates it in roughly this way, although there are variations: some use total supply or fully diluted supply to represent the number of tokens, and some employ various strategies to try to filter outlier data. CoinMarketCap is a popular tracker, and is widely cited in both crypto-specific and mainstream media when referring to specific cryptocurrencies’ market caps and the market cap of crypto as a whole, so I refer to it throughout.

She then discusses three of her primary concerns with crypto valuation

  • price
  • liquidity
  • wash trading ...

…. and most importantly the question of why does this matter

The “market cap” measurement has become ubiquitous within and outside of crypto, and it is almost always taken at face value. Thoughtful readers might see such headlines and ask questions like “how did a ‘$2 trillion market’ tumble without impacting traditional finance?”, but I suspect most accept the number.

When crypto projects are hacked, there are headlines about hackers stealing “$166 million worth” of tokens that in reality amounted to 2% of that amount (around $3 million) after hackers’ attempts to sell illiquid tokens caused the price to crash.15 I know because I’ve written some myself—it’s an easy habit to slip into.

When NFTs are stolen, large numbers are thrown around without any clarity as to whether they are the original prices paid by the victims for the NFTs, the prices netted by the thiefs when flipping them, the floor prices, or some other value.

All of this serves to legitimize cryptocurrency as though it is a much bigger industry than it is, with far more money floating around than there is. It serves to perpetuate the narratives that NFTs are “worth” far more than they could likely fetch at auction, or tend to appreciate in value quickly, encouraging more people to buy in to projects that are likely to result in losses. Stories about “crypto-millionaires” and -billionaires encourage more people to put their real money into the system—something it desperately needs—not realizing that they may be exchanging it for “gains” on a screen that can never translate into reality.

Maybe there will be greater care on the part of the journalists writing the stories you read about the exciting times in the crypto markets and maybe some greater regulation of valuation and disclosure practices – maybe not. In the interim, Molly offers a good introduction to the questions you might ask yourself as you read the news.

Let me know what I am missing

Tony – From the Outside

Author: From the Outside

After working in the Australian banking system for close to four decades, I am taking some time out to write and reflect on what I have learned. My primary area of expertise is bank capital management but this blog aims to offer a bank insider's outside perspective on banking, capital, economics, finance and risk.

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