The Myth of Market Cap - Version 2

Feb 19, 2018

It's difficult for most people to get past the psychological barrier of the infamous "Market Cap". For those that don't understand what market cap is, I first want to point out that it stands for "Market Capitalization", and is in NO WAY an attempt to define a CAP (limit, or capacity). It's a profoundly complex mathematical formula so brace yourself for this very long and brain-wrenching definition of a coin's Market Cap......

Ready??

last trade price TIMES circulating supply

omg, are you ok? Stay with me now...

Yes, the Market Cap formula is this ridiculously infantile multiplication between two numbers. It is PRECISELY because this formula IS so stupendously simple, that it has become adopted by the masses as some form of meaningful indicator of... something! What that is exactly, not many people can put their finger on, but generally most people believe that the higher it gets, the more likely it is to fall.


On with the myth-busting:

Myth #1) The Market Cap represents how much money has been pumped into a coin

This is the single-most common misperception that virtually everyone falls for, at least in the beginning. For example, if a market cap is worth say $1 billion dollars, then there must've been $1 billion dollars of money pumped into it, right? Wrong. Dead wrong. So wrong, that I have to keep saying wrong just to really drive home the point of how incredibly wrong it is. Wrong.

Remember, the formula is LAST trade price TIMES circulating supply. So if person A buys 100 Bitcoins for $10K each, then the Market Cap is $10K TIMES ~17 million coins = $170 billion. Then person B comes along and buys 1 Bitcoin (just ONE) for $10.2K. That TIMES ~17 million = $173.4 billion. The Market Cap has increased by $3.4 BILLION DOLLARS because ONE person bought ONE Bitcoin for an extra $200!!! Yes, really! This is how it works!

This is how incredibly stupid and USELESS the calculation of Market Cap is in the first place. What the hell is it good for? It doesn't actually reflect the money behind the coin, it's absurdly large and can be exponentially manipulated by one simple small trade; I mean, I'm at a total loss to understand how it's possible that it has proliferated like it has. It's like watching the same card trick over and over and over and over and over, and the audience (the same audience), just does not get the trick. Applauding like morons every single time the trick plays out.

What's even far worse, is the perception that the Market Cap can also represent what can be taken 'out' of the market. Saying things like, Chris Larsen could be the world's first trillionaire! Lol. Oh man, let's see just how many millions he can pull out before XRP (and with it the Market Cap) tanks to historical lows. I bet he wouldn't even pay off his mortgage.

Market Cap does not in any way indicate the health, wealth, or potential of a coin. It's a meaningless number given to the masses to play with. A psychological barrier, nothing more.

Myth #2) You can compare the Market Cap of one coin to the Market Cap of another

Let's say my intensely savvy mother opened a successful shoe-repair shop and has 1500 shares in her business, and she sold me 500 shares for $50,000 ($100/share), then the Market Cap would be $150,000 ($100 TIMES 1500).

To contrast, let's say IBM's Market Cap is $145 billion.

Circle any of the following that are true:

  • IBM's Market Cap is waaaaay too high because mom's shoe-repair shop Market Cap is nowhere near that, THUS, IBM is due for a major correction

  • mom's shoe-repair shop's Market Cap is waaaayy undervalued compared to IBM's Market Cap, and is an exceptionally good buy opportunity before the next parabolic hits

If you circled any of the above, you're stupid.

Yet, amazingly, people fail this test for stupidity all the time with crypto. Why? Because they don't understand what the hell it is they are investing in; end of story.

Bitcoin is the shoe-shop; a rickety hum-drum collage of best-intentions, creaky doors, and a doppleganger outlet on every corner. People have been coming here for years, and their shoes have always been fixed in less than a week. Why rush a good thing?

Ethereum is Starbucks, big, high-strung, very high-tech, but once you get past the caffeine high, it's long lines, expensive, and the boutique charm is wearing off. Don't get me started about the music.

Ripple is SpaceX. Hundreds of the best people in the world. Companies, governments, militaries, all foaming at the mouth at the possibilities. You want that fucking car in orbit around the sun in 8 minutes? Done.

Go ahead, try to convince me that Ripple's Market Cap has one goddam thing to do with Bitcoin's shoe sales. Please, you're embarassing me because you're not embarrassed.

You CANNOT compare different coins' market caps!!

Bitcoin's effective realm has been reduced to an anonymous store of value, that's it. It will never be a real-world daily-use currency, it will never be cheap to transact, companies are dropping it as a form of payment, and there's yet another Bitcoin version coming out all the time! It's crap! Crap! Sure it may continue to grow because of name-branding, or with the addition of the complex beast of Lightning Network, but even without negative propaganda, the experience of using Bitcoin alone serves to severely limit more growth.

Ether also has a lot of the same issues: slow, not scaling (still waiting on sharding..), expensive, etc. But it isn't about money as much as it is about Dapps and contracts. This is its unique product, albeit, its ability to support that market is pretty saturated right now (already??), so unless the technology improves scaling dramatically, it's going to remain bogged down, driving further adoption away. Market Cap will drag.

Ripple, badabing (sorry). Imagine a pile of gold to the sky, worth quadrillions of dollars. This is the bank's pile. They see mom's shoe-shop and keep walking (it's obviously a money-laundering operation). They stopped for coffee at Starbucks and even though the coffee was good, the line killed them (don't get me started about the music). Then, they saw a fucking car in space.. a fucking car... in fucking space...

Now all the banks want to know is, how do they get their car into space.

Ripple's market cap has nothing to do with any other coin whatsoever. If Bitcoin's market cap can reach X amount solely on anarchist gibberish, money laundering, and name-branding alone, and if Ethereum can muscle its way to respectability with just a promise of maybe delivering some day; then Ripple, production-ready, regulatory-compliant, foot-in-the-door, and coming up on first base.. let's just say that we're orders of magnitude away from what the Market Cap needs to be to be able to digest all that banker's gold. In other words, we're leaving Bitcoin/Ethereum behind.

Myth #3) Market Cap can be used to predict maximum value

Man, this one hurts. How many times have you read people's valuation of "well, there's trillions of dollars moved by SWIFT every day, so trillions divided by Ripple equals lots". Dumb.

There is only one mechanism that creates value: supply and demand. Supply is easy, it's the number of LIQUID coins that are immediately ready for trade; not speculator-Hedl coins, not escrowed coins, not lost coins, not burned coins, not reserve coins, not contractually-restricted coins, or any other conceivable condition by which a coin is not liquid, ESPECIALLY...dadadaaa... coins in flight (very important). The number of actual liquid coins is a very small fraction of all coins; literally, all the liquid coins are on some form of exchange, whether it be a conventional crypto exchange, a trading app on your phone, etc. It must be ready to move to count.

Most coins are locked up, I'd go so far as to say 95% of XRP are out of the market's reach, and therefore do not contribute to supply in the context of determining value. That leaves 5%, which is less than 5 billion XRP, and it's only THIS small pile of coins, that everyone needing to procure XRP, will be fighting over.

The "Demand" part of supply and demand, is an aggregate of many forces, but those forces all sum together at the point of purchase on an exchange. When demand is greater than supply, the price goes up; and vice versa. Demand for XRP will come from one thing, increasing usage. If I want to send my mother $150,000 worth of XRP, I will create demand. The more people buying their mother's shoe-shops, the more demand gets created.

You might say, well as soon as mom sells the XRP I sent her, we have a net zero situation and the price wouldn't change. Yes, you are correct, but if during my purchase, transmission, and mom's sale, someone else needs to buy some liquid XRP, there'll be less supply of them available, and the price will be higher. Extend this scenario to where hundreds of thousands of transactions are happening per hour, and you should see that a lot of liquid XRP has been converted to in-flight XRP, drying up the supply, and rapidly driving up the price because of scarcity.

In other words, the "volume" of XRP "utilization" trades (where XRP actually LEAVES one exchange for another for the purpose of value transfer, not speculative trading), will be what determines the basis for "real" demand, and it won't pay any attention whatsoever to said Market Cap. Demand is demand, and it will be satisfied at any cost. Higher volume, higher demand, higher price.

This isn't taking into consideration speculative valuations, this is literally the base value calculation driven by utilization alone, but I think we all know that speculative value is the 1000-lb gorilla in the room. Without speculation, XRP's value could never bootstrap itself high enough to reach the liquidity required for the banks to be able to use it in the first place. The higher we push XRP, the closer we get to bank adoption, and they'll take it from there.

Forget about how much SWIFT transfers in a day, or how much money there is in the world. The only number that matters is XRP utility-trading volume, and there are so many unknowns that contribute to this number that it makes no sense to even attempt an edumacated guess.

For example, Jevons Paradox will take any present day financial metrics and exponentially blow them through the roof. Instead of saying "SWIFT sends trillions per day so XRP must equal blah to handle it"; you need to think, well XRP will turn those trillions per day into trillions per...minute?

Yes, I'm not exaggerating. There's nothing we see today that can serve as a basis for the reinforcing effect that instant money-transfers will have on the economy, any more than a mailman from the days of the pony express could've estimated the number of global emails sent by people every day.

Death to Market Cap!!


(If you're curious about attempt 1, it's here, and admittedly painful to read)

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