Crypto’s Market Cap is not Over $1T: That’s a Good Thing

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17 Jan 2024

Remember when crypto’s total market cap almost hit $3T? Or what about now, when the market cap is $1.39T?¹ Market Cap, or market capitalization, has become a major indicator in determining momentum in the market. Looking a little deeper, the market cap isn’t even close to $1.39T. For the upcoming bull market, that’s a good thing. I will show you why below.

Understanding Market Capitalization

First we need to start with defining market capitalization. A technique used commonly in the stock market, is calculated by multiplying the current price of an asset by its total number of shares.
Bitcoin Market Cap
Let’s look at Bitcoin as an example. The price is $36,662.38 and there are 19,545,962 Bitcoin tokens in the market. You multiple those together and you will get $716,601,497,878. The goal of market cap in the stock market, is to show the value of the company. The same applies for most (i.e. BNB, CRO) which are separate from the actual company.
However, this straightforward calculation masks basic economic fallacies and other hidden facts that aren’t talked about.

Economic Fallacies

How much would you pay to buy a dozen eggs? After you buy one dozen, would you pay less or more for another dozen? What about another dozen? Hopefully you said you’d pay less, and you’d be correct. The same is true for normal markets. If you’ve taken Econ 101, you’ve heard of supply and demand.
Supply and Demand
As quantity increases (i.e. someone is selling tokens), the price would decrease if demand isn’t there. So the basic assumption that someone could sell 1M+ BTC without affecting the price is impossible. Remember what happened when FTX collapsed? SOL dropped by 50% in a few days because everyone wanted to sell and no one wanted to buy.
SOL Price Collapse
To go a step further, remember why CZ tweeted he was selling FTT?
CZ FTX Tweet
This was because Alameda Research owned $5.8B or 40% of their $14.6B balance sheet in FTT.² Having $5.8B worth of a token when the circulating supply is only $3.3B,² is a massive problem. CZ found out about this and quickly looked to divest those assets before FTX / Alameda’s loans overtook the value of their companies.
For DeFi, supply and demand is not similar to the stock market in that there is no bid/ask for the assets. Instead, most users use liquidity pools to trade tokens. Liquidity pools (LPs) are algorithms where a pool has a percentage of different types of assets with the most common being two tokens with 50% each. When a user trades a token for the other token, the pool charges a fee to rebalance the pool back to 50–50. As the trade value increases, the fee increases because the pool is becomes unbalanced. For some assets, Curve or other large LPs can handle large volume trades. But in reality, anyone who is making trades in the hundreds of millions or billions is using centralized exchanges or other methods.

Locked Tokens

Most of us aren’t early investors in projects but if you are, then you’ve come across locked tokens. These are just tokens that were distributed to the founding teams and associated personnel which have a vesting period. If you work for any major company, the same concept applies with restricted stock options. These coins are usually included in the total market cap.
For example let’s look at Curve Finance. Below is a snip from their docs.
The Curve team gave 1.3b tokens with different vesting periods from 1–4 years. This is approximately $0.72B at CRV’s price today. The locked tokens aren’t able to be sold so they do not affect the market price.

Lost Coins

Remember the guy in the U.K. who threw away his computer with 8,000 BTC? These stories are common in crypto because of people losing their private keys. For BTC alone, the estimates range from 3 to 6 million BTC or 15 to 30% of total supply is lost forever.
That’s upwards of $219B that may no longer be accessible…… 1/6 of the total crypto market cap!
This problem is true across crypto and will continue to grow as people make mistakes and lose their private keys.

Leverage

Another hidden problem in crypto is leverage. Yes, TradFi has the same issues… The point here is that leverage can hide the true value of projects as investor think the company is worth more than it really is. One of the most common mechanisms for leveraging is “looping”. This is done when you deposit crypto into a lending protocol (e.g. Aave, Trader Joe), borrow against your collateral, and redeposit back into the protocol. You do this a few times and you have looped or leveraged your position. Lending protocols don’t keep track of who is looping, so they just add the assets to their total value locked to inflate the numbers they have on their books.
This is a problem because then companies who allow leverage, look bigger than they actually are. As a result, their tokens get inflated in value as they are perceived to be larger than they should be.

Why is this all Important?

When we enter the next bull market, there is the idea that as price rises, more and more money will need to enter crypto to continue to make prices rise. This is obviously true. The point is that $1T does not need to enter into crypto to have a requisite increase of $1T in market cap. The number is actually much much lower. Think about how much crypto is hidden away in cold wallets or know people who will never sell their crypto.
Going back to Econ 101, when the quantity is limited and demand increases, price rises.
Remember this point when you are told crypto can’t get to $100k or crypto can’t be a $10T market.
-Just Another Crypto Analyst
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