Lights on crypto market capitalization

In an effort to demystify crypto for mainstream audiences, the industry appropriates terms from traditional finance. For example, lending firms such as BlockFi, Gemini, FTX and many others used words like yield or interest in marketing materials in an attempt to convince investors that depositing assets on these platforms was akin to bank savings accounts.

Granted, this may not be the most favorable example given the current state of these firms, but the assimilation of traditional financial jargon into crypto doesn’t have to be a bad thing. However, it requires you to understand these key terms and how their usage differs between the crypto and Trad-Fi worlds.

This article will focus on the concept of market value, often abbreviated to market value.

Define market value

A simple definition for market value is the value of all outstanding shares at the current share price. So as an example, if Company A had 10 million shares outstanding that trade at a price of $20 each, the market capitalization would be $200 million.

Because cryptoassets are traded 24/7/365, the industry has adopted market cap as a way to track the value of various assets. For example, at the time of this writing, bitcoin’s (BTC) market cap 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 value of $196 billion. The total market value of all crypto assets is $1.06 trillion according to calculations made by Messari.

It seems simple enough, but there are some important distinctions to be made. For example, with the exception of bitcoin and ether, many of these tokens are backed by for-profit entities whose equity ownership is privately held. These shares, which are not freely tradable, can have dramatically different values ​​than the total value of outstanding digital assets. For example, the value of all outstanding tethers (USDT) and USD coins (USDCUSDC
) are $67.1 billion and $43.77 billion, respectively. Does this mean these companies are worth that much money? Of course not because these tokens do NOT represent ownership in the companies behind these coins. Before Circle (the USD Coin issuer) canceled the SPAC deal, the firm itself was going public with a valuation of $9 billion.

Now, while there is some debate as to whether some stablecoins can be considered securities, many investors are likely to buy USDT or USDC to get a stake in TetherUSDT
or circle. However, the situation becomes murkier when it comes to assets such as e.g GDP
GDP
(Binance) or other centralized exchange tokens that OCD
OCD
(OKEx) or CRO
CRO
(Crypto.com). For a complete list see here.

On the whole, these assets trade in line with the fortunes of these platforms, or their perceived momentum, but they convey no form of ownership or management rights. In fact, these companies claim that their exchange tokens are not securities. Buying miles with an airline does not mean you are a shareholder.

I want to touch on another important point regarding market value: the difference between free float and fully diluted. In the world of tradable assets, the term free float refers to the total number of shares that can be traded on public markets or OTC tables. This often does not include shares held by close associates, such as founding family members, or shares locked up by the directors. or managers. Fully diluted means the total number of shares tradable in a scenario when things like all employee options and convertible debt are exercised. In traditional stock markets, these can be different numbers.

Crypto uses these terms too, but not consistently, and it’s important to keep this 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, it is not true. For example, there are billions of dollars worth of bitcoin that have been lost or not moved for more than ten years. Satoshi Nakamoto is known to own 1.1 million bitcoins ($25.3 billion). Many believe that these assets will never be moved. Data aggregator CoinMetrics tracks a free-float bitcoin metric, claiming that roughly 6 million bitcoin ($138 billion) are not freely tradable.

This will obviously make the existing bitcoins scarcer, and in theory more valuable.

Almost 6 billion Bitcoin
BTC
Can never shop again

Finally, sometimes the difference between free float and fully diluted market value is 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. This type of deal can lead to venture capital firms, and of course the founding teams, holding very large amounts of tokens. Should these flood the market, it could drive prices down, as many times these large institutions agree on vesting plans and token unlocks that take years. When these projects start, a very large percentage of tokens can be unlocked (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 floating market caps for the largest tokens with lockups.

As you can see below, the older projects like Uniswap, AAVEAAVE
Axie Infinity and DecentralandMANA
has a locking percentage of around 20%. However, AptosAPTOS
, a newer blockchain founded by ex-Meta employees with a controversial monetary policy, has 85% of its tokens under restricted status. Aptos has been in the news for a nearly 400% increase in price over the past few days, but that growth looks less impressive when you consider this fact.

Buying into high lock tokens is ok, as long as you know the risks involved.

Older projects have higher free flow