The value of Bitcoin and other cryptocurrencies that have been experiencing a rapid collapse in rates recently is displayed using various factors, the most popular of which is market capitalization. Some analysts believe that it is wrong to evaluate a crypto asset by its price, which is based on the current level it’s trading at on the exchanges. Why is the market capitalization of digital assets not a reliable metric?
Manipulation of Market Capitalization by the Whales
Cryptocurrency researchers point out that poor liquidity combined with less stringent rules on many crypto exchanges allow founders and large asset holders to manipulate market capitalization rates on sites like CoinMarketCap easily. This happened during the ICO boom last year when whales pumped the exchange rate of certain coins to achieve the rates they needed.
In addition, when publishing asset rates, CoinMarketCap does not use data from Asian markets, particularly South Korea, since Bitcoin prices are usually higher there than in Europe or the U.S., as Anatoly Radchenko, co-founder of United Traders, told at the Crypto Event RIW conference. Although, in theory, market capitalization should take into account rates from all crypto trading platforms. Since not all data is considered, the value of the coins is not entirely true.
Evaluation of Cryptocurrency in U.S. Dollar Terms
The most popular currency in which a crypto asset is valued along with its market capitalization is the U.S. dollar. This is a deep philosophical problem, as market capitalization, which, in its essence, is the product of the token’s price and its total supply, implicitly assesses the success of each crypto project based on the expected future currency output. For the industry, stemming from an attempt to invent new, absolutely identical types of money—more precisely, its non-financial form—it is contradictory to rely on fiat currency.
The prioritization of dollar-based return on investment contributes to the creation of communities of zealous crypto enthusiasts who plan to make a profit thanks to high exchange rates. Large indicators of a crypto asset in real fiat currency rarely attract professionals, for example, software developers or entrepreneurs with their own business who, if they wish, can advance the development of the industry and make blockchain and the use of cryptocurrencies widespread.
Day traders and imaginary cryptocurrency specialists from Twitter, Telegram, and YouTube, who gather audiences and use their credulity, earn a lot of money. Even if the opinion of Internet users coincides with the upcoming events in the market, ubiquitous analysts do not influence the crypto culture in the desired way; they do not develop it. Another category of current users belongs to the pioneers in ICOs, when each project started collecting fiat money and creating useless tokens.
The Impact of the Community on Attracting Investment Is Important
Digital coins and their development are directly dependent on the team that develops the technology and the tokens. Specialists team up, study a new field, and create their product. All members of the community are driven not only by the thirst for money but also the idea of cryptocurrencies. Of course, not every project and digital asset have high goals—there are quite a few scams in the industry, but already popular coins offer new ideas for decentralizing the economic ecosystem.
The crypto community, as noted by many market researchers, has become more reasonable and calm. It has learned to somewhat distinguish scams from up-and-coming projects. Therefore, if it is necessary to evaluate a token of a project, then it is essential to assess the quality of work and the team. In this case, however, the price, by definition, depends on the dollar.
Crypto Asset Measurement Tools
DeCenter has already written about how the value of a crypto asset is calculated. Often, tokenomics is based on the basic concepts of traditional economics and uses variables from formulas to obtain the fiat value. Therefore, the data is not entirely accurate, because traditional economic science does not take into account the unique ecosystem of digital assets.
The analysts of the well-known CoinDesk proposed using a more relevant indicator for measuring Bitcoin, which reduces the importance of price as a measure of value.
After all, weighted multi-dimensional representation of an asset’s value includes a multitude of objective measures of interaction and interest in each crypto project with their own unique coins. The price or market capitalization should be just one of the five selected indicators. Do not forget about the activity of the developers, trading volumes on the exchange, transactions on the blockchain itself, and community activities on social networks.
After evaluating all the factors, a general image of the coin appears; an idea of its nature and its surroundings is formed. For example, if we look at it, Zcash’s perception is highly distorted concerning the involvement of the developers, which seems to reflect the passion that many cryptographers have for the sensitive data protection technology that underlies the coin. But the project has very few transactions and very little participation on social networks.
On the contrary, the profile for XRP dominates due to participation on social networks and reflects the existence of the “XRP Army” on Twitter and other social media platforms. Besides, Ripple is developing on its own experience; therefore, it recently began to communicate with the community. After all, maintaining direct communication with investors and project users is one of the main points for high-quality project work.
Bitcoin as a Basis Instead of the Dollar
According to analysts at CoinDesk, it is best to measure the cost of altcoins not in the U.S. dollar but Bitcoin. Some researchers, however, have already criticized the choice of the first digital asset in history as a reference for other coins, because in this case, this status is considered as supporting the prejudices of the so-called Bitcoin maximalists, who believe only in the first digital asset.
In principle, the balance or the average index of some coins and their weighted average value could level the problems with community criticism. But these calculations would be difficult. In addition, one hundred percent evaluation of Bitcoin in all five dimensions does not reflect the absolute data—analysts presented their vision for comparison. It is likely that any altcoin can beat Bitcoin in any of the five indicators, and then we will have to evaluate the higher currency by the subordinate.
The model where Bitcoin will be used as a starting coin for estimating other values will be similar to world markets, where there are many currencies from different countries, and the American dollar is used to measure data in identical indicators. Often the currencies of the strongest economies in the world, such as the pound for the U.K. and the euro for the E.U., are worth more than the dollar.
According to the chosen measures, at the moment, Bitcoin, despite its low rates, is the most popular asset in the cryptocurrency market and is credible before the community. Probably in the future, if the dominance of digital gold changes, it will be possible to use another crypto coin to evaluate all other projects.
Of course, this method of building a notion of cryptocurrencies is experimental and carries a rather recommendatory, alternative initiative for a more multifaceted assessment of a crypto asset in its environment, which is different from the traditional economy.
At the moment, large institutional investors, as many projects have repeatedly stated, are on the verge of entering the market, and it is imperative that they put off their dollar pricing models and recognize that the value of digital assets lies not only in the market capitalization of the coin. After all, the cryptocurrency market is different from the world of traditional stocks and bonds, and that makes it attractive.