Cryptocurrency Bitcoin
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In an effort to demystify crypto for mainstream audiences, the industry is appropriating terminology from the traditional financial world. For example, lending firms like BlockFi, Gemini, FTX and many others used words like rate of return or interest in marketing materials to convince investors that depositing assets on these platforms is like bank savings accounts.
Granted, this might not be the most favorable example given the current state of these firms, but adopting traditional financial jargon into crypto doesn’t have to be a bad thing. However, it does require you to understand these key terms and how their usage differs between crypto and the trade-fi world.
This article focuses on the term market capitalization, which is often abbreviated as market capitalization.
Define market capitalization
A simple definition of market capitalization is the value of all outstanding shares at the current share price. For example, if Company A had 10 million outstanding shares priced at $20 each, its market cap would be $200 million.
Top 10 cryptos by market cap
Knife
With crypto assets being traded 24/7, the industry has adopted market cap to track the value of different assets. For example, as of this writing, the market cap of Bitcoin (BTC) is approximately $444 billion. We arrive at this number by multiplying the price of bitcoin – $23,003 – by the total number of bitcoins created, approximately 19.1 million. We can repeat this function for each asset. For example, Ether (ETHETH) has a market cap of $196 billion. The total market cap of all crypto assets is $1.06 trillion, according to Messari calculations.
It seems simple enough, but there are some important distinctions that need to be made. For example, with the exception of Bitcoin and Ether, many of these tokens are backed by for-profit companies whose shareholdings are privately owned. These shares, which are not freely tradable, can have dramatically different values than the total value of the outstanding digital assets. For example, the value of all outstanding Tether (USDT) and USD coins (USDCUSDC) is $67.1 billion and $43.77 billion, respectively. Does that mean these companies are worth that much money? Of course not, because these tokens do NOT represent ownership of the companies behind these coins. Before Circle (the USD coin issuer) canceled its SPAC deal, the company wanted to go public itself with a valuation of $9 billion.
Although there is some debate as to whether some stablecoins could be considered securities, many investors are likely buying USDT or USDC to get a stake in TetherUSDT or Circle. However, it becomes more difficult with assets such as BNB BNB (Binance) or other centralized exchange tokens like UN UN (OKEx) or CRO CRO (Crypto.com). A complete list can be found here.
Broadly speaking, these assets trade in accordance with the fortunes of these platforms or their perceived dynamics, but they do not convey any ownership or governance rights. In fact, these companies argue that their exchange tokens are not securities. Purchasing miles with an airline does not mean you are a shareholder.
I’d like to address another important point regarding market cap: the difference between free float and fully diluted. In the world of tradable assets, the term free float refers to the total number of stocks tradable on public markets or OTC desks. This often includes shares that are not closely held, for example by family members of the founders, or shares that are blocked by their directors or executives. Fully diluted means the total number of shares that could be traded in a scenario if things like all employee options and convertible debentures were exercised. In traditional stock markets, these numbers can be different.
Crypto also uses these terms, but not consistently, and it’s important to keep that in mind. Take Bitcoin for example. Since the original crypto asset has no issuer, no convertible debt, and no options, its free float and fully diluted numbers should be the same at $444 billion. In reality, that’s not true. For example, there are billions of dollars worth of bitcoin that has been lost or not moved for more than ten years. Satoshi Nakamoto is known to own 1.1 million Bitcoin ($25.3 billion). Many believe these assets will never move. Data aggregator CoinMetrics tracks a free-float bitcoin metric that claims about 6 million bitcoin ($138 billion) is not freely tradable.
Obviously, this would make the existing bitcoins scarcer and theoretically more valuable.
Nearly 6 billion Bitcoin BTC may never be traded again
BTC free float vs. circulating supply
CoinMetrics
Finally, the difference between a free float and a fully diluted market cap is sometimes constructed. For example, many projects that raise money from venture capitalists give them tokens as opposed to shares. There is no magic rule; it depends on each individual transaction. These types of deals can result in venture capital firms and of course the founding teams holding very large amounts of tokens. Should these flood the market, prices could plummet, so often these large institutions agree to vesting schedules and token activations that take years. When these projects start, a very large percentage of tokens could be locked (some more than 50%), but as they mature, more assets become liquid and the percentage goes down. The chart below shows the fully diluted and free float market caps for the largest tokens with lockups.
As you can see below, the older projects like Uniswap, AAVEAAVE, Axie Infinity and DecentralandMANA have lockup percentages around 20%. However, AptosAPTOS, a recent blockchain founder by former Meta employees with a controversial monetary policy, has 85% of its tokens under restricted status. Aptos has been in the news for its almost 400% price increase over the past few days, but that growth looks less than impressive when you take that fact into account.
Buying tokens with high lockups is fine as long as you understand the risks involved.
Older projects have a higher free float
Table of crypto projects
nomics
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