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Why Market Capitalization is not the Most Valid Crypto Parameter

Cryptocurrency market capitalization is seen as one of the easiest ways to determine which cryptocurrency token is faring better than the others. The concept of ranking tokens on the basis of their market capitalization has been borrowed from the traditional equity market.

The market cap ranking is used for publicly traded companies, where it indicates what is the worth of the shares of a particular firm in the current market. The formulae used to determine the same is done by calculating the current share price multiplied by the number of outstanding or free-floating shares.

This method works perfectly fine for the traditional equity market as the equity shares of a particular company are traded on a single exchange and all the information regarding the shareholders can be publicly verified.

However, crypto trade market functionality is completely different, and we will discuss how the market cap valuation of a particular token is not the best criteria to determine the position or the functionality of that token.

Why the borrowed Ranking System Does not Paint The Correct Picture

Bitcoin, the first generation of cryptocurrencies was not an instant hit but took several years before gaining public trust and acceptance. Before 2016, there were only a few cryptocurrencies in the public domain, however, the surging prices suddenly saw many new tokens getting added to the crypto space, and it was becoming quite difficult to monitor each of them.

Websites were looking to find an easy way to rank these cryptocurrencies and help the community to have a benchmark to fall back upon. So, these crypto ranking websites started to measure the value of the circulating supply.

This is where the basic problem lies specifically for the crypto space, the circulating supply does not have a clear definition. And most of the websites who are ranking these coins do not take the pre-mined coins into consideration.

If you are not new to the crypto world, you must be aware that there are various coins which do not have a well-defined circulating supply and every year or every quarter certain amount of coins get added to the total supply. This takes the market cap of that particular coin higher without it making much of the difference in the overall value of each coin.

Let us suppose the X-coin is trading at $100 in the market, and its current supply is 1 million, so the market cap of the X-coin stands at $100*1 million. But, the X-coin adds 100,000 coins every quarter, now each quarter the market supply would increase and hence the market capitalization value would increase as well, without making much of a difference to the actual price of the token. Thus, the current methodology paints a vague picture of market trends.

Is There a Better Parameter To Measure the Market Capitalization

The crypto community needs to decide what does market cap stands for, and it should ensure that the metric is inclusive rather than vague. Since most of the cryptocurrencies today have pre-mined tokens and a certain amount of new tokens gets added to the circulating supply, what we can do is, the number of newly added tokens should be either shown with a different metric, or some kind of info should be provided on the new stock of tokens being added.

The other methodology we can use is, only the actual circulating supply should be taken into consideration to determine the market cap, since the added amount buffs up the ranking without showing the actual reason behind it.

We can agree that the current metrics of use are easy to understand, however, what’s the use of parameter which does not deliver on the task it has been assigned for. The addition of complex parameters might make things messy at first, but people who are ready to invest in the crypto market can definitely do away with that much amount of complexity.

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