The problem with crypto market values

Market cap in the crypto world can be misleading indicators of value, and industry watchers say metrics like user growth and developer activity should be given more weight.

A crypto asset’s market value is calculated by multiplying the number of tokens or coins in circulation by the current market price of a single unit. The metric is widely – but perhaps incorrectly – used to assess the performance of a cryptocurrency and how valuable it is.

It is true that the higher the price, the higher the market value of the corresponding cryptocurrency, but they do not take into account token lock-up periods or supplies held by company insiders.

In the traditional world of finance, market values ​​certainly matter a lot. That’s simply because they represent the dollar market value of equity, which allows investors to weigh a company’s profitability rather than going by sales numbers.

A problem with the metric unique to crypto is that lost tokens end up being counted against the market value, rather than subtracted from the supply. For example, about 20% of today’s supply of bitcoins, or $140 billion, is either lost or stuck in neglected wallets. Should lost tokens be accounted for in terms of the present value of the remainder?

Growth, protocol usage are better crypto market indicators

Looking at circulating market capitalization, more specifically, rather than fully diluted, can be misleading, according to Oskari Tempakka, Token Terminal’s head of growth.

“It’s a metric that many investors look at without taking into account locked tokens, vesting plans, etc. So there can be a very large difference between the circulating and the actual fully diluted market cap,” he told Blockworks.

Tempakka believes that digging into developer documents and white papers to estimate token unlocks can have a large effect on the price of a single token. He added that many investors, bad enough, don’t even bother to check market capitalization, and instead make decisions based on the price of a single token.

More valuable indicators, he says, are what service a particular project has put out there, how much use it sees and how much fee revenue the service generates.

“The most important indicator of value in your protocol, to me, is a fundamental analysis of what’s going on under the hood from a business perspective,” Tempakka said. “The more organic growth and usage you have, and the more active user growth you have, the higher the valuation of a protocol should be from a fundamental perspective.”

Volatility during market cycles

Market values ​​can also fluctuate wildly during bear and bull cycles, due to changing market sentiment, and do not reflect deeper insights such as transaction volume, number of users or activity on the network.

“In bull markets, you often see protocols explode in value due to speculation. But when the speculative fervor has died down, market caps often tend to be large,” Daryl Kelly, founder of NFT platform LTD.INC, told Blockworks. So this metric says very little about whether people like using any crypto protocol in question, including a particular DeFi or metaverse project, he added.

Blockchain developer count is another good metric

Kelly believes developer activity is a more useful indicator of the strength of a crypto or project.

“Just look at Ethereum and Solana. The amount of developer activity on these networks is huge and it’s only growing,” he said, adding that this benchmark suggests sufficient demand from users on these blockchains to build more applications for everything from DeFi and NFTs for crypto games.

A State of Crypto report published by a16z in May shows that Ethereum managed to attract 4,000 monthly active developers, beating out other protocols.

Santiago Portela, CEO of FITCHIN, agreed that market capitalization is a flawed metric, pointing out that Solanas does not reflect the strength of the blockchain.

From a price perspective, Solana can be perceived as poor results. But it’s a different story when considering the volume of NFTs transacted on the blockchain. This month, trading volumes at Solana-based marketplaces such as Magic Eden and Metaplex reached their highest level since May.

“It tells me that adoption is increasing in that network and that there are developers behind it — these are actually the key aspects to really understand the strength and resilience of the ecosystem,” he said.

But not everyone thinks market values ​​are a weak measure. Nischal Shetty, CEO of Indian crypto exchange WazirX, said they can be a useful tool to gauge the strength of various protocols. But he agrees that hype during bull markets can cause market values ​​for obscure protocols to explode beyond the utility they offer.

More reliable metrics – aside from developer numbers – include user growth, number of active wallets and dApp (decentralized apps) usage, according to Shetty.

“One reason behind Ethereum’s success is that it has a large number of applications built on it which in turn attracts users. And this user growth also attracts more developers. So in this case you have a good cycle where developer activity and user growth feed off each other. It’s therefore I think it is important to look past the hype, including market value, he said.

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