Tuesday, February 18, 2020

How To Use MarketCap & Supply To Determine A Crypto’s True Value

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Grace Joseph
Freelance Writer, Blogger, and Crypto Enthusiast. Studied Computer Science in University and Undergoing a Masters Degree Programme in Computer Engineering Contact@ reigngracia@gmail.com

A cryptocurrency’s market capitalization and supply are usually ignored while more priority is given to its price. However, the latter should be the reverse since these two are just as important in determining a cryptocurrency’s true value. Accordingly, you’ll find the terms market cap, supply, and price associated with cryptocurrencies and stocks, but what do they really mean.

Market Capitilization

Market capitalization is the dollar equivalent of the value of a coin’s circulating supply. It is the product of the coin’s current price and its circulating supply (Market capitalization = current coin price * coin supply). Let’s take Bitcoin, for instance, it currently has a price of $5,106.91 and supply of 17,643,562 BTC. Therefore, the product of both gives it a market value of $90,104,083,213.4.

Alternatively, the coin’s price can be determined by = Market Cap/Circulating Coin Supply

Coin Supply

A coin’s supply, on the other hand, can be described in two ways which are its total supply and circulating supply. The total supply is the number of coins there can ever be for that particular cryptocurrency. This includes those that are circulating and yet to be mined or held in reserve (held in a smart contract). The circulating supply, in contrast, denotes the number of coins that are available on the market.

For example, Bitcoin has a total supply of 21 million coins, but a circulating supply of 17 million. A virtual asset’s supply is important because it can make or mar its price, but not in all cases. A good number of coins with lower supply are known to have a higher price in comparison with those whose supply is high.

However, there are cases where a coin with a high supply has more market value than a coin with a low supply.

For instance, if:

  • Coin A has a market cap of $10,000,000 and a supply of 1,000,000
  • Coin B has the same market cap of $10,000,000 but a supply of 10,000,000

Then (based on Price = Market Cap/Circulating Coin Supply) the price of coin A and B will be $10 and $1 respectively. While coin B has a lesser price, its real value is equal to that of A. There are even cases where it could even be higher.

An instance is shown in the image below between Pundi X and Siacoin. Pundi X currently has a market cap of $137 million with a circulating supply of about 194 billion. Siacoin has a market cap of $123 million with a circulating supply of 40 billion.

What Influences a Cryptocurrency’s Market Capitalization?

There are other determinants of a cryptocurrency’s market value which has caused the above condition not to hold true in certain cases. Some of these are the coin’s demand, the hype around the coin due to a publicity stunt, project backing it, exchange it is traded on, and even the emotional behavior of investors.

Demand Meets Supply

It does not come as a surprise that some cryptocurrencies whose supply are high have more value and price than those with less supply. A reason for this is the high demand for the former in comparison to the latter. As is the case in the real-word, the higher the demand, the higher the price. But what happens when the supply is low and the demand for it is low as well. Now, that would be an instance where a low supply no longer cuts the deal.

Application and Adoption

Despite the high supply of some virtual assets, they can still have a value higher than coins whose supply is less. The latter is as a result of use cases it has which has created a high demand. There is also the habit of buying only the top coins on crypto indices and as such, it can also influence a virtual asset’s market cap over those that are ranked lower. That being so, judging a coin’s worth in the near future solely based on its supply would not entirely be a good decision.

Dead Coins:

Losing the private key to your wallet is as good as never being able to access such funds again and as such, the coins are lost as well. In the same vein, hackers who have stolen a virtual asset with no way of redeeming it can also help to create dead coins. As a result, it could also impact the digital currency’s market cap.

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