Alex

[Dom Kwok | EasyA @dom_kwok]

market cap does not apply to crypto.

in fact, i'd go as far as to say it's completely irrelevant.

i spent my undergrad @wharton studying valuation and later on wall street at @blackstone and @goldmansachs.

i've valued hundreds of assets across every major industry.

understandably, many of you have asked for my thoughts on why "market cap" does not matter.

so here's why:

1. stock vs crypto market caps (an apples to oranges comparison).

the most common mistake people make is comparing the market cap of a stock to that of a token. many people claim that X token can't reach Y market cap because it would be worth more than Apple or Nvidia - quelle horreur!

to understand why this is incorrect, it's important to note how market cap is measured differently for stocks vs crypto.

stock market cap = share price x no. shares outstanding

crypto market cap = token price x circulating supply

as you can see, you're measuring two entirely different things:

- stocks generate revenue, cash flow and represent ownership in an underlying company. a stock price is (typically) derived by discounting the company's future cash flows to find a present value.

- crypto (much like commodities) is valued by its utility, supply / demand, and how much it's being used on a particular blockchain network. utility tokens are not designed to be bought and held. they're designed to be used to pay gas fees for conducting transactions on a blockchain network.

therefore, comparing stock and crypto market caps inevitably yields non-sensical results. it's like arguing whether lionel messi or michael jordan are better athletes.

it's also why comparing the market cap of bitcoin to that of a company (ie walmart) makes no sense; bitcoin generates no revenue and has no physical value, yet its market cap greater than walmart's.

2. crypto market cap reflects the total monetary value of a digital network (ie blockchain).

unlike a company, tokens can't be valued by discounting future cash flows (most do not generate meaningful revenues). instead, their value (much like gold) comes from the market deciding what they're worth and their usage.

so as demand increases, price increases (often regardless of traditional fundamentals like revenue, EBITDA etc).

3. fixed supply vs non-fixed supply

fundamentals aside, crypto market dynamics (which more closely resemble those of commodity markets vs stocks) also make "market cap" is a misleading metric. given the absence of strict fundamentals, price is largely determined by supply and demand.

most importantly, but not limited to, two main reasons:

- crypto (much like commodities) has a (mostly) fixed supply. this means that following any sudden increase in demand, price will increase suddenly due to the fixed supply (also known as a supply shock).

- stocks, on the other hand, have a non-fixed supply. big run-ups in price are typically met with "secondary offerings", whereby companies issue more stock at the higher price to capitalise on the increased demand and raise money at better terms.

this is an important but subtle difference that means crypto market caps can balloon far beyond what would be considered realistic. anyone remember tulipmania, where one tulip became worth as much as a mansion in amsterdam?

4. market cap multiplier

perhaps the most nuanced point of all, and contrary to popular belief, reaching a market cap of $1 trillion does not actually require people to invest $1 trillion. in reality, the amount of fiat invested into the token is only a fraction of its market cap.

thanks to the multiplier effect, $1 of new capital invested could increase the market cap of the token by multiples of that number.

so while it might sound smart to bring up "market cap", it's a misnomer when it comes to crypto (or pretty much any new technology - see $SPCX and other AI companies!).

[Alex @KShot_]

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