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Understanding Market Metrics

Cryptocurrency Market Metrics Explained​

Cryptocurrency markets are dynamic and complex, with various metrics that provide critical insights into token performance, market trends, and investment potential. Platforms like CoinGecko provide data that helps investors and users navigate the crypto space more effectively. Below, we explore some of the essential market metrics that are pivotal in cryptocurrency analysis:

Market Cap​

Market Cap, or Market Capitalization, is a fundamental metric used across financial markets to determine the total market value of a company's shares or, in the case of cryptocurrencies, the total value of a currency's circulating supply. It provides a quick snapshot of a cryptocurrency's relative size and its financial footprint within the broader market ecosystem.

How Market Cap is Calculated​

Market Cap is calculated using a simple formula: Market Cap = Current Price per Coin x Circulating Supply

Example: Bitcoin's Market Cap​

Let's consider Bitcoin, the first and most well-known cryptocurrency. If the current price of one Bitcoin is $20,000 and there are 19 million Bitcoins in circulation, the market cap would be: Market Cap = $20,000 x 19,000,000 = $380,000,000,000

Why Market Cap Matters​

Market cap is crucial for several reasons:

  • Investment Insight: It helps investors assess the relative size of a cryptocurrency compared to others. Larger market caps often indicate a more mature and stable asset, less susceptible to extreme volatility.
  • Market Dominance: Market cap can indicate the dominance of a cryptocurrency in the market. For instance, Bitcoin often holds the largest market cap, underscoring its role as the market leader.
  • Growth Potential: Comparing market caps across different cryptocurrencies can help investors identify potential growth opportunities. Smaller-cap cryptocurrencies might offer higher growth potential, albeit with higher risk.

Fully Diluted Valuation​

Fully Diluted Market Cap (FDV) is an important financial metric in the cryptocurrency world that refers to the valuation of a crypto asset assuming all its future supply were issued and circulating at the current prices.

How Fully Diluted Market Cap is Calculated​

The Fully Diluted Market Cap is calculated using the following simple formula: Fully Diluted Market Cap = Current Price per Coin x Maximum Supply

Example: Using Bitcoin​

For example, if the current price of Bitcoin is $20,000 and the maximum supply of Bitcoin is capped at 21 million coins (the total number of Bitcoins that will ever be mined), the fully diluted market cap would be: FDV = $20,000 x 21,000,000 = $420,000,000,000

This calculation assumes that all 21 million Bitcoins are in circulation, even though as of now, not all have been mined.

Why Fully Diluted Market Cap Matters​

  • Future Market Size: FDV provides insights into the potential future market size of a cryptocurrency. It is particularly important for new or developing projects where a significant portion of the total supply might not yet be circulating.
  • Investor Perspective: It helps investors evaluate the possible inflationary impact of new tokens that will be released in the future. This is crucial for understanding long-term investment potential and risk, especially for coins with a large yet-to-be-released supply.
  • Valuation Comparisons: FDV allows for more accurate comparisons between cryptocurrencies with different issuance schedules or maximum supplies, offering a "what-if" scenario that levels the playing field.

Key Variables in Calculating Market Cap​

Understanding market capitalization in cryptocurrencies involves more than just the current price; it's also about knowing how much of a cryptocurrency is available and how actively it's traded. Here are four essential metrics:

24 Hour Trading Volume​

The 24 Hour Trading Volume refers to the total dollar value of all transactions involving a specific cryptocurrency conducted over the past 24 hours. It is a direct indicator of how actively a cryptocurrency is being traded and is often used to gauge market sentiment and liquidity.

How 24 Hour Trading Volume is Calculated​

The trading volume is calculated by summing up the value of all trades of a cryptocurrency within a 24-hour period. For example, if Bitcoin had 1,000 trades in the last 24 hours and each trade involved $10,000 worth of Bitcoin, the 24-hour trading volume for Bitcoin would be $10 million.

Importance of 24 Hour Trading Volume​

  • Market Liquidity: High trading volume indicates high liquidity, meaning it is easier to buy or sell the cryptocurrency without affecting its price too much. High liquidity is generally a sign of a healthy market with active participants.
  • Investor Interest: Changes in trading volume can signal shifts in investor interest. For instance, a sudden increase in volume may indicate that something significant is happening with that cryptocurrency.
  • Price Volatility: High volume can also lead to increased volatility — more trading can mean larger and quicker price changes as traders execute large volume orders.
  • Market Validation: Consistently high volume may validate a cryptocurrency's market position, suggesting stability and longevity.

Circulating Supply​

Circulating Supply refers to the number of cryptocurrency coins or tokens that are actively available and circulating in the market. This metric is paramount in assessing a cryptocurrency's liquidity and market capitalization.

Definition and Calculation​

Circulating supply includes all coins or tokens being actively traded in the market and held by the general public. It excludes any coins that are locked, reserved, or not available for trading. This figure is calculated by subtracting any locked or reserved tokens from the total supply. These locked tokens can include those held in escrow, reserved for future issuance, or tied up in "cold storage" by the founders or developers.

Factors Affecting Circulating Supply​

  • Token Releases: Many cryptocurrencies have scheduled releases or mining processes that gradually increase the circulating supply.
  • Token Burns: Some projects actively reduce their circulating supply by "burning" tokens – removing them from circulation permanently, which can increase scarcity and potentially drive up value.
  • Regulatory and Contractual Lock-ups: Certain amounts of a token might be locked up due to regulatory requirements or as part of smart contract conditions, affecting the amount in circulation.

Total Supply​

Total Supply refers to the total amount of coins or tokens that currently exist for a given cryptocurrency, minus any coins that have been officially removed from circulation (burned).

Definition and Calculation​

Total supply includes all coins or tokens that have been mined or created up to the current date. This number encompasses not only the circulating supply but also includes coins that are held in reserve, locked, or not available for public trading yet. Unlike circulating supply, total supply does not subtract any coins that might be lost or inaccessible.

Factors Influencing Total Supply​

  • Minting and Mining: Many cryptocurrencies increase their total supply through mining or minting processes, where new tokens are created as rewards for blockchain validators.
  • Token Burns: Some projects periodically "burn" or destroy tokens to reduce the total supply, often to create deflationary pressure and increase the value of each token.
  • Initial Coin Offerings (ICOs) and Token Allocations: When a new cryptocurrency is launched, a certain number of tokens are created and allocated. These allocations can include portions set aside for development funds, team members, or early investors, influencing the total supply.

Max Supply​

Max Supply is the capped limit on the total number of coins or tokens that will ever be created for a particular cryptocurrency. This is a critical concept in the cryptocurrency space, particularly for those that aim to create a deflationary economic model.

Definition and Calculation​

Max supply is predetermined by the cryptocurrency's protocol and is encoded into its underlying code. It represents the total amount of coins that will ever be mined, minted, or otherwise produced. Once this cap is reached, no new coins will be generated.

Factors Influencing Max Supply​

  • Cryptocurrency Design: The max supply is usually set at the launch of the cryptocurrency and is intended to align with its long-term economic policies and goals.
  • Community Consensus: In some cases, the max supply can be changed through community consensus, although such changes are rare and typically require substantial agreement among network participants.
  • Technical and Economic Adjustments: Some projects may adjust their max supply in response to new technical developments or economic conditions, although this can be controversial if not handled transparently.

Market Cap vs. Fully Diluted Market Cap​

When analyzing cryptocurrencies, understanding the differences between Market Cap and Fully Diluted Market Cap (FDV) is essential for gaining a complete picture of a cryptocurrency's value and its potential future market impact. Each metric offers distinct insights into the financial health and valuation of a cryptocurrency.

  • Current vs. Potential: Market cap looks at the current state of the market, using only the circulating supply, while FDV considers the potential state by including the maximum supply.
  • Real vs. Theoretical: Market cap is based on real, tangible metrics—the current circulating supply and price. FDV, however, is more speculative, incorporating tokens that may not impact the market for years, if ever.
  • Volatility Influence: Market cap can be volatile and influenced by daily trading activities, whereas FDV tends to be more stable over the short term, as the maximum supply doesn’t change frequently.

Conclusion​

Both Market Cap and Fully Diluted Market Cap are vital for evaluating cryptocurrencies but serve different purposes. Market Cap offers an immediate view of the market’s valuation and is essential for day-to-day trading insights. In contrast, Fully Dilated Market Cap provides a broader, more long-term perspective, helping investors understand the full potential impact of the total supply of the cryptocurrency. Investors and analysts often use both metrics together to get a more holistic view of a cryptocurrency’s financial status and to make informed decisions based on both current conditions and future projections.