What Is Market Cap and Why Does It Matter?

What Is Market Cap and Why Does It Matter?

By BitcoinGordon | BitcoinGordon | 6 Apr 2021


You may have looked at this title, said "duh" to yourself and moved on, in which case you aren't reading this and the joke's on you.

You may have even read the title and said "duh" twice! Just in case, I'm here to break it down and see if you learn anything as a result.

A wise man on rec.audio.pro, a forum before the internet looked like the internet, once said: "I know enough, to know I don't know enough".

If we all follow that creed, we will all share an opportunity to be one small step smarter than we were yesterday, and some people might even like us better as a result for not pretending to know more than we do.

A lot of people enter stonks or crypto believing that Market Cap is "marketcap" and they see it as a slang for the absolute top ceiling value of something. They believe market cap means the highest value an asset hit for that cycle, assuming 24 hours. Is that still you? Or, have you moved beyond that point?

So, the first "duh" of the article, is that market cap is two words, and it stands for market capitalization. Since it is not talking about that absolute 'cap' of the day's circulated value, then it must have something to do with capital used as a verb... one might even say an action verb.

Remember those times that I write about the importance of volume and liquidity? One time, I even compare it to the power of the nucleus of an atom, where the massive energy generated by spinning positive and negative charges creates the illusion of solid matter. Well, this is one of those times that prove the model. If we see any value in market capitalization, then we need to understand how it works.

Investopedia is a GREAT website resource for anyone interested in trading.

Here is their page on Market Capitalization:

https://www.investopedia.com/terms/m/marketcapitalization.asp

On their site, they explain that the market capitalization "is calculated by multiplying the total number of a company's outstanding shares by the current market price of one share". It is the total value of that asset on that day. That number is arrived at by looking at the current price, and then looking at how many of that item exist.

This is an incredibly interesting number when looking at Bitcoin, and it is not completely unique to how stonks work either. There is a finite number of Bitcoins ever to be mined. Until that very last, unbelievably challenging coin is mined, the supply will be assumed to be short the demand. That is yuge!

Right now, there's a supply of over 18 million Bitcoins, at a price hovering around $58,000. That number would give a market cap of $1.044 Trillion. That is an absolutely astronomical number, and it is a number that does in fact matter. Many people have arguments for why market cap is a bad metric. I disagree with them, but simply see that it is but one of numerous values that matter.

For instance, many of us try to follow when there is whale activity on Bitcoin. One of those metrics is when a large number of coins is withdrawn from an exchange, which is assumed that means a whale is moving them to a private wallet for safe keeping. The overall supply of Bitcoin may still be 18+ million, but the reality is that there may be 10,000 that just left supply that won't truly be in circulation for a long time. Someone knows to wait until their $58,000 coins are worth $250,000 for instance.

Therefore, while the total value of price and quantity does matter, there is a weak link in determining the actual circulation.

A strong correlative value to consider, then, is the volume traded. If a person does an in-depth analysis of the long-trending price of an asset and the value of the volume generated, one will find patterns that speak to exactly how much that asset is valued. There's more to price, and there's more to circulation.

If we know a very good average of how much Bitcoin there will be, because we know technically how hard it is to mine, how often it will be adjusted, etc., then we can make a vast range of assumptions on what that means, if we use the data that already exists. With new assets this is virtually useless, but with Bitcoin we have more than a decade to analyze... oh yeah!

The number of coins that exist, already mined, versus the number of coins that someone is actually willing to sell makes a huge difference in one important factor: how many coins does it take to generate 'x' amount of volume? Between wash trades, market-maker spreads, and the mad reaction to spiking price, a ton of Bitcoin is circulating, but at a rate one's head is now spinning, it's like the atoms... it's the same ones trading over and over again. Eventually, the higher it goes, the less willing people are to take a fair market value, and it is my belief that at key markers, like $70K, 80, 90, and certainly $100,000 we're going to see many of those 1,000-10,000 stacks of Bitcoins come ridin' back in on exchanges to sell for profit. The thing is, once those new purchases are made and market price keeps soaring, eventually the next correction comes along, and someone who sold at $70K may buy even more at a discount when it plops to $65K ever-so-briefly.

I could continue to show how the actual order books tell us just as much as the market cap, but that is probably best served in a separate post.

The point is first to know the metric, second to know how it impacts decisions, and third to always recognize that there's more to learn from everything we think we know.

And on that note, a perdy key of "G"... Gordon Freeman, hero to the uncrypto'd, motivator of the markets, gentlemen to the NFT masses... out.

 


BitcoinGordon
BitcoinGordon

Hi! I'm Gordon Freeman (I hear they made a likeness of me in some video game... totally unrelated... or...).


BitcoinGordon
BitcoinGordon

Welcome! This is my blog for all things crypto, from my day trading and tutorials to general crypto news.

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