$Coinbase Global, Inc.(COIN)$ This is common knowledge for many, but there's plenty who still need to hear it.
Forget price; think market cap
In this post, I'm going to break down what market cap is, what it isn't, and how it can help you get a better perspective on the coins and tokens you're trading. That said, I'm a simple man and prone to mistakes - so let me know if I got anything wrong in the comments.
Also fair warning: I went pretty hard on the farming analogies here.
What is market cap?
Market cap is the current price multiplied by the number of coins or tokens in existence. It's pretty easy maffs.
Imagine you own a farm. The farm has 100 chickens. You can sell one chicken for $1. Your farm is therefore "worth" $100.
Now that all seems simple enough -- but it's easy to get tripped up.
Market cap does not represent the total value injected into the system.
Bitcoin having a 1 trillion dollar market cap does not mean that everybody together spent 1 trillion dollars on Bitcoin.
Imagine that a rich traveller comes by your farm. You're a good businessman, so you decide to sell him a chicken for $2. In that one transaction, your farm became "worth" $198 ($2 * 99 remaining chickens).
Not bad, hey? With just $2, you got an extra $98 of market cap!
This is how some shitcoins game the system. We see a big market cap and think that there is a lot of value in the system. After all, SHIBA INU has a $3B market cap, so it must be a real project, right?
Wrong. There are 394,796,000,000,000.00 SHIBA INU tokens in the market, so even the tiniest prices make the market cap appear huge. This is why shitcoins often burn tokens at the start: many market trackers include the burnt tokens in the market cap calculation - making it easier to fool people into thinking that their projects have actual worth, without having all that extra supply depressing the price.
So if scammers use market cap to confuse people, why use it?
Imagine you have a neighbour with a cow farm. He has 2 cows. He can sell each cow for $45.
One day you get into a heated discussion. Whose farm is better? Surely a farm where you can sell cows for the richly sum of $45 is more valuable than one where a chicken is worth a mere poultry dollar, your neighbour claims. But is it? Market cap can help us decide.
100 chickens x $1 = $100
2 cows x $45 = $90
It's easy to see that chicken farming is the rural pursuit of superior worth.
Market cap helps you anchor to reasonable price predictions
You feel pretty satisfied for winning the argument with your neighbour. Then something occurs to you. What if, one day, your chickens are worth $45??? Then you'd have $45,000. It's not so unlikely, right, seeing as the price of cows is that high?
It's pretty easy to spot the flaw in thinking here. There are many more chickens, so price is unlikely to rise that far, even with a moderate increase in demand. But time and time again that's how we think about crypto. Man, I'm going to be rich when my $2 ADA matches the price of my friend's $3000 ETH!
The thing is, price is a function of supply and demand. Supply is the quantity of something available in a market. If there is a large supply, a much higher demand is needed to match the price of something else which has a low supply.
This is where market cap shines. It lets us see the relationships between price, supply, and demand.
Imagine that ETH didn't exist and everyone who uses it used ADA instead.
If this was the case, ADA's market cap would be the same as ETH's is now. But because the supply of ADA is higher, the price would be lower. If the math is too complicated, here's a great website which does all the calculations automatically for you. In this hypothetical, ADA would be worth about $11.
Market cap doesn't help you make accurate price predictions, but it does help you understand other people's
Does that mean that ADA will never reach or exceed $11? Not necessarily. There's three ways it could happen:
Demand for ADA one day equals demand for ETH today
Demand rises for ADA relative to the dollar (ADA @ $11 would mean ETH at $16k+ this way)
The supply of ADA is greatly reduced for some reason
Bringing it together: can ETH reach $10k?
Let's look at another common price prediction, ETH to $10k. It's fun to say, even more fun to imagine. But when someone says they think ETH will go to $10k, what do they actually mean?
Well, we can look at market cap for answers. If ETH had the same marketcap as BTC, it would be worth $7800. So we know that anyone who predicts $10k ETH must think that: it's going to have 28% more demand than BTC does today; or demand for the entire crypto market is going to increase by 333%; or the supply of ETH is going to reduce by 60%; or some combination of those factors.
Do any of those sound reasonable to you? If so, maybe $10k ETH is on the menu. If not, maybe you shouldn't be anchoring to that price psychologically.
TL;DR -- use market cap, rather than price, as your primary metric when considering the value of a coin or token
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