Podcast: How meaningful is the market capitalization?
Market capitalization is one of the most recited metrics when it comes to evaluating a crypto currency like Bitcoin. But a closer look shows that this measure is not without it.
You know this: Open your browser and check the market capitalization of the crypto currencies first. After all, the market capitalization pages have experienced at least as much boom as the listed crypto currencies in recent years. What is behind it?
Bitcoin news: Why is there market capitalization for crypto currencies?
The colourful world of cryptos is difficult to follow and it is even more difficult to classify the developments according to Bitcoin news. From the stock world there is the metric of market capitalization. This is calculated by multiplying the number of shares issued by the price of a single share. The net result of this formula is the market capitalisation of the company in question.
Accordingly, the market capitalisation of a crypto currency can be derived. Take the number of issued coins and multiply them by the current price of a coin. This makes it relatively easy to rank the crypto currencies. At first glance it can be seen that Bitcoin is the top. One gets the impression of order in the Wild West of crypto currencies.
What is the problem of Bitcoin formula?
Unfortunately, the market capitalization as calculated does not give a thorough insight into the world of Bitcoin formula crypto currencies. The Bitcoin formula can be manipulated in several ways. To illustrate this, let’s imagine creating an ERC-20 token with a fixed set of tokens that is available right at the beginning – the so-called MarketCapCoin. There are a total of 10,000,000 MarketCapCoins. If I now sell one of these tokens to my unsuspecting neighbor for one euro, my token would have a MarketCap of 10 million euros according to the above formula.
Here it quickly becomes apparent that market capitalisation is a fictitious value and says nothing about the invested capital or the quality of the crypto currency. The BTC-ECHO Podcast will tell you what other difficulties this measure entails and which metrics would be better.