Read my previous post: Sovryn, Babelfish, & RSK Network... oh my! [#GetInMyDeLorean]
A heuristic can be a valuable tool for assessing complex information and taking decisive action. However, a flawed heuristic is often simply a shortcut to failure. I've recently begun to consider market capitalization as the defining metric for analyzing potential growth. I developed the #DeLoreanMethod as a heuristic for exploring short-term future growth potential based on market cap alone. I've written about it in, "Key Observations of Meta Market Cap. What is the DeLorean Method?" And I've also begun a post series demonstrating how I've been applying the #DeLoreanMethod:
> The "Secret Sauce" for identifying deep value in Low-Cap cryptocurrencies is not so secret #FluxCapacitorHyperGrowth (Part I of III)
> Actually Applying the "Secret Sauce" to find deep value in micro-cap coins #FluxCapacitorHyperGrowth (Part II of III)
> Part III of III is still being written... I'll have to remember to come back and link it here once it's been published
The #DeLoreanMethod has thus far been a helpful heuristic (even if overly simplistic) for evaluating value based on market capitalization. Using the #DeLoreanMethod has led me to some excellent value coins, although I have overlooked some critical components of market capitalization in my heuristic and projections. I have since realized that, by virtue of their respective definitions, the most fundamental aspects of price also apply to market capitalization. I'll try to elaborate, but these concepts are fairly complex and I'm not sure that I can convey them adequately. So, please consider this post to be exploratory rather than instructional.
If I were a high level investment wizard I would probably have a lot more money to show for it. But if I can properly understand the illusive nuances of market capitalization, price, and supply... I may have a chance of continuing to outperform Bitcoin (which is what I've managed to do in my Robinhood portfolio over the past 3 years). Otherwise, what's the point of all this? Why not just buy BTC and sleep better at night? It's a legitimate question for me even now, because I can't really attribute my past success to my new #DeLoreanMethod system or my own wisdom or investment philosophy. My next post is going to be about how I grew $600 into $25,000 in 3 years trading crypto and stocks in my Robinhood account. I'm excited to finish writing it because I'm not even sure exactly how it happened and I certainly wasn't thinking much at all about market cap during that time.
So hopefully, now that I'm thinking in more nuanced terms about #MetaMarketCap, I can do better than 4,160% over the next 3 years. 40x is really nice, but I would love to see 100x and 1,000x returns in my portfolio over the next 3 years. With the capital I have already accrued, that kind of return could really change my life. If you follow my blog, hopefully you'll see it happen and maybe we'll even ride some of the same bulls. Alright, let's review the relationship between market cap, price, and supply so that we can get on towards a more nuanced understanding of market capitalization.
Market Cap, Price, & Supply
Definitions of Market Cap (MC), Price (P), & Supply (S):
Market Cap (MC) = Price (P) x Supply (S)
Price (P) = Market Cap (MC) / Supply (S)
Supply (S) = Market Cap (MC) / Price (P)
Studying these simple definitions has given me key insights but I need to revisit their interconnected relationships in order to reach a more nuanced understanding of market capitalization. Let's use a hypothetical Block 2 The Future coin ($B2TF) with a market cap of $100 Mil, a price of $100, and a supply of 1,000,000.
Hypothetical B2TF Coin (MC, P, & S):
$100 Mil (MC) = $100 (P) x 1,000,000 (S)
$100 (P) = $100 Mil (MC) / 1,000,000 (S)
1,000,000 (S) = $100 Mil (MC) / $100 (P)
We can more readily observe the interdependent relationship between market cap, price, and supply by plugging in hypothetical values into these equations. From here we're able to make the transition to thinking of value in terms of market capitalization, as opposed to simply thinking of value in terms of price. Defining value only in terms of price leads us to the cheapest coins with the highest supply.
If we define value in terms of price alone, we would see the most value in the coins at the very bottom of Coinmarketcap.com (with the lowest market capitalization) and generally the smallest price and highest supply. Of course, we know these are mostly failed projects and "shit coins", so there's not a lot of value there and we can generally see that pretty quickly. However, defining value solely in terms of price, also leads to another potentially more subtle folly.
Does Price = Value
If we think of value only in terms of price, we neglect to perceive the value of a higher price supported by a lower supply. So we may overlook low market cap gems with a low supply because the price seems too high. This is why it's important to stop seeing value only in terms of price. Price is an important metric, but only when we control for the variable of supply. In this way, we may come to view market cap as a sort of expression of price which controls for supply. The fundamental difference between conceptualizing of value in terms of market cap, as opposed to price, is the consideration of supply.
If supply and price determine market cap, and every coin has a different supply and price, then how can we conduct an "apples to apples" evaluation of coins? This is what led us to develop the #DeLoreanMethod and the concept of GC[x] or Growth Ceiling Multipliers. GC[x] is a simple construct for estimating a coin's maximum short-term price multiplier based on a comparison between its present market cap and a projected maximum future market cap relative to top performing coins in the same market sector over the short-term.
Recall our hypothetical $B2TF coin and imagine a hypothetical competing blog coin called, Successful Blog Coin ($SBC). $SBC has a market cap of $1 Bil compared to my hypothetical $B2TF coin, with a market cap of just $100 Mil. If I project that my $B2TF coin has the potential to grow to at least equal the market cap of $SBC (with a market cap of $1 Bil), then the GC[x] (Growth Ceiling Multiplier) for $B2TF is 10x. So the price of $B2TF could grow from $100 to $1,000 if $B2TF catches up with the market cap of the $SBC.
At the simplest level, this is what we're doing with the #DeLoreanMethod. However, we base our market cap projections on understanding of key elements of Meta Market Cap. We're not simply conducting a 1:1 comparison of coins. We're defining a projected future market cap of a coin, based on our knowledge of the greater cryptocurrency market cap as well as the stock market and fiat market caps.
Fundamentals of Price = Fundamentals of Market Cap
We often see technical chart analysis and speculative discussions of price. Everyone is trying to guess whether the price will go up or down based on past performance. We can use moving-average based trading indicators like a Relative Strength Index or Bollinger Bands to evaluate price. And we can draw trend lines to extrapolate possible future price targets for support and resistance. We see cup and handle patterns in the charts and angry breakout squeezes and so-forth. But all of this discussion is seeking to anticipate the future price that the market will agree to pay.
That's the critical part we often overlook in all of the complexity and evaluation. The market sets the price when two parties agree to a transaction. This is the simple beauty of truly free markets. I won't go off on a tangent now about how the criticisms of corporate crony markets calling themselves free don't apply to pure capitalism which allows the market to define prices. But then I'd have to give a defense of pure capitalism in the face of price gauging and monopolies and I'm not prepared to get into that here.
The point is that as consumer level investors, we don't often contemplate how price is established. When we go to a market and see a present price, we can either decide to buy or sell at or around that price with a market order, or we can place a limit order to buy or sell at a specified price. So when our orders are filled, we set the price. Some exchanges report the price as the last transaction price and others report the price as the average between the highest bid and the lowest ask. So we can begin to conceive of the price of a given commodity, security, asset, service, or good as the price the market is willing to pay at that moment.
In some cases there are overhead costs or material value which define a minimum market price for a commodity, service, or good. However, with "paper investments" like stocks, and perhaps even more so with cryptocurrencies, the price can be almost entirely speculative. I won't go into a whole rant about how utility tokens shouldn't be defined as securities and how people really shouldn't be trading utility tokens like securities or on platforms which regulate them as securities. We can save that conversation for another day, although I did write about it in my post, Chuck E Cheese's sells unregistered securities & LBRY sells utility tokens.
Suffice it to say cryptocurrencies do not represent any ownership in a corporation or claim to its material property in the event of a liquidation. For this reason, most cryptocurrencies should not be defined as securities. Moreover, the absence of a claim to ownership of property in the event of insolvency, is another factor which makes cryptocurrency an inherently more volatile and speculative market. Therefore, if the price or a cryptocurrency can be almost entirely speculative, and the market cap is defined by the price and supply, then the market cap will move in tandem with the speculative fluctuation of the price.
There is a Hard Cap on Fiat Market Cap, But We Can Still Raise The Roof in Speculative Markets!
With highly speculative markets, at a certain point the only resistance against infinite price increase is the opportunity to buy other things of value. So people begin to look around and say, "hey I can buy a house with all of this Bitcoin". Then they do that and the price gradually corrects as those earliest to the market begin to discover all of the things they would rather have instead of paper stocks or digital coins representing money. Then a new cycle of investors enter and the process starts all over again.
Meanwhile, the HODLer resists the temptation to sell for flashy things in the real world, as he watches the market repeatedly churning out new cycles of investors as the price support steadily rises with each cycle. However, since price is subject to the whims of the speculative market, and market cap is defined by price and supply, then fluctuations in price don't just have a direct impact on the market cap, they reflexively define the market cap.
Of course, we should all be aware of this information already. It's self-evident. However, revisiting the definitions of price and market cap have helped me attain a greater comprehension of the principles of #MetaMarketCap. For example, it is apparent to me now that the market cap of fiat currencies is a relatively static inflationary figure which we can express as having a value of ~$120 Trillion USD (even though there are only ~$20 Trillion fiat US Dollars in existence).
The market cap of all fiat currencies defines the total amount of fiat currency in the world, but it does not define the total amount of value in the world. We can express the value of stocks and cryptocurrencies in terms of dollars and we often do. However, when we do this, we observe that the market capitalization of all stocks can be expressed as ~$90 Trillion USD, even though there are only ~$20 Trillion fiat US Dollars in existence.
The market cap of all fiat currencies defines the total amount of fiat currency in the world, but it does not define the total amount of value in the world.
This post is continued in Part 2 of Towards a More Nuanced Understanding of Meta Market Cap. Thanks for reading! I look forward to engaging with your comments below. Please like, tip, and subscribe if you found value in this post!
#GetInMyDeLorean #FluxCapacitorHyperGrowth #LowCapValue #MetaMarketCap #B2TF #BlockToTheFuture
Read my next post: Towards a More Nuanced Understanding of Meta Market Cap [Part 2 of 2]
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