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The article (or, rather, the commentary in the link above on the article) talks about the fallacious notion of "market cap" in regards to cryptocurrencies. That

The article (or, rather, the commentary in the link above on the article) talks about the fallacious notion of "market cap" in regards to cryptocurrencies. That is to say, e.g., multiplying the number of bitcoins in existence times the current market price is a silly metric because the entire market would never be able to cash-out at that maximum price. What I was wondering was: is there a better number? e.g., is there a way to calculate the amount of USD put into a cryptocurrency across a timeframe? What I'm imagining is a metric like (sum of all bitcoins bought by USD purchase price) - (sum of all bitcoins sold by USD sale price) = amount of USD that has been put "into" bitcoin. That first glance, one might expect this number to equal zero, but it should be greater than zero because of the new coins created by mining.

jaggirs 5y ago
For every btc bought there is one sold, the equation you gave thus adds up to zero.
mrb 5y ago
The market cap metric may seem silly to you, but it's the same metric used by publicly traded corporations. And there is nothing silly about it. All shareholders would never be able to cash out at the current share price, but this isn't a reason to disregard the market cap metric.
- acdha 5y ago
  There’s a key difference: corporate shares have a value anchored in the company’s assets and revenue. The market cap can still fluctuate, of course, because different people will have different assessments of the future profitability but the floor is going to be based on the company’s assets, contracts and sales predictions, obligations, etc. In contrast, cryptocurrencies have no floor because there’s no inherent value to a random number and nobody has a need to pay for a specific token. If something falls out of favor, there’s no reason to expect to find a buyer at any price.
  - nightski 5y ago
    Value is anchored in the equilibrium between supply and demand, that's it. Maybe the things you mention do drive that equilibrium. But I'd bet you'd have a hard time developing a profitable trading strategy based on those metrics alone. I know I have tried with little success.
  - mrb 5y ago
    Corporations can still very much "fall out of flavor", driving their revenues and assets to zero. This criticism isn't only applicable to crypto. And cryptocurrencies' intrinsic value is this: they are payment networks that work even where traditional systems fail. No denied transactions. No limits. No "account" to open. Works for the underbanked. Send money truly anytime anywhere. No other system does this. That's the value. In the end, there is no fundamental difference between a service provided by a corporation vs a service provided by cryptocurrencies. Both services can and do have value.
    - acdha 5y ago
      > Corporations can still very much "fall out of flavor", driving their revenues and assets to zero. This criticism isn't only applicable to crypto. That's technically correct but missing the point: cryptocurrencies are an extreme outlier in that they have literally nothing other than social consensus backing them. If you look at examples of failing companies you will find a few cases of Theranos-level fraud but far more cases where a company was mismanaged into the ground but shareholders received _something_ and it's not common for this to happen so quickly that nobody had time to react. The more common trajectory is something like Sears or RIM where the writing was on the wall for years while the PE guys strip-mined the corpse or someone buys it to go patent-trolling, where a savvy investor has plenty of time to exit before the end and the people at the end still receive a fractional payout. > And cryptocurrencies' intrinsic value is this: they are payment networks that work even where traditional systems fail. No denied transactions. No limits. No "account" to open. Works for the underbanked. Send money truly anytime anywhere. No other system does this. That's the value. This is a good example of the problem: those claims are either completely untrue or significantly overstated but you have a significant financial interest in repeating them because being honest will imperil your ability to find someone willing to pay more for your random numbers than you paid originally.
secabeen 5y ago
I would extend this concept to all non-cash financial assets. All of what you wrote above applies to Tesla shares, or Ukrainian real estate, or anything that's not currency. It would still be incredibly useful, but it's also based so much on psychology, I don't know if there's a mathematical way to calculate it, like there was Black-Sholes for futures. A concrete calculation for this would revolutionize finance.
- neuroma 5y ago
  Agree, but, mind bender... this relationship also applies to currencies. A useful statistic is the volume transactions required to shift the price 2%, looking at an open order book. It gives you a notion of the available liquidity. It is liquidity that matters, as it allows influx and efflux without causing inelastic price movements.
- Animats 5y ago
  There's book value and price/earnings ratio. Valuation of operating companies is well understood. Buffett buys on that basis.
ludamad 5y ago
I like e.g. '2% liquidity depth' measure along with market cap, to show how steep the iceberg is if you start selling
- davidgerard 5y ago
  yep, this is the sort of number a crypto trader actually cares about. "Market cap" gives a crypto trader no usable information.
bigtunacan 5y ago
Overall, I enjoyed the analysis of the piece, but I disagree with their take on market cap. Amy Castor - "Yeah, market cap is a meaningless number. It assumes everyone bought at the current price and could cash out at the current price." We could just as easily apply that basic logic to any security. Amazon(AMZN) is ~3275 a share with a market cap of ~1.668T. That also assumes everyone could cash out at ~3275, but the reality is if selling pressure is higher than the buy side demand that selling shares will drive the price down as buyers would be able to continually bid lower. Eventually it would reach ~0 share price and effectively a 0 market cap. So in that sense token market cap is a fair equivalency. What makes a dollar worth a dollar? Crypto value at any given point in time is just an exchange value against fiat currencies. This isn't much different than an exchange value between USD and the Ruble; it will fluctuate.
- FabHK 5y ago
  > We could just as easily apply that basic logic to any security. Not quite. An Amazon share is a claim on future residual cash flows, whose net present value constitutes the (unknown) "true value" of the share. If Amazon falls to 1/10th of its current price because of some tweet by Elon or whatever other (extraneous, fluke) reason, lots of people would be lining up to buy it, because they get a stake in an actual business that would repay them their investment within a few years. So, no, it would not reach 0 share price. (So, while the argument in the article needs some refinement, its broad thrust is true: market cap for a publicly traded company is much more meaningful than market cap for a crypto currency.)
  - nightski 5y ago
    In theory it sounds so logical! Is it though? Have you actually tried to apply this in practice to a trading strategy? I think once you start trying to predict prices based on NPV of future cash flows this quickly falls apart, even with large behemoths like Microsoft, Apple, etc...
    - FabHK 5y ago
      I am not suggesting that you or I can compute the NPV of future cash flows and then value the share, certainly not easily. But that was not the point. The point was to distinguish shares (and other securities) from coins: the price of the former is (softly) constrained to be within the vicinity of their intrinsic value. Cryptos have zero intrinsic value.
vmception 5y ago
> What I was wondering was: is there a better number? e.g., is there a way to calculate the amount of USD put into a cryptocurrency across a timeframe? Velocity is a very important factor that critics of asset-wealth ignore. When it comes to criticizing crypto-assets specifically, people just turn their brain off or are completely ignorant to how assets they respect work in order to hold crypto-assets up to a fictional higher standard. but even when articulating their standard its like "do they even know what they're talking about?" for example, when comparing crypto assets to currencies, due to the "cryptocurrency" misnomer and skeumorph in the name, the illiquidity and relative few transactions in comparison to the marketcap seems like an important area to focus on, to them, while completely missing that currencies are broken down into 4 segments for this exact same reason. M1 being that tiny sliver used for transactions with M2 and beyond being illiquid allocations of the currency, the similarity of behavior ironically bolsters the currency aspect of crypto in what was supposed to be a criticism. Many of these criticisms focus on the conversion to a fiat currency, and neglect the ability and reality of acquiring goods and services and investments directly with the crypto. I see something like this over and over again. These all factor into how one would go about valuing any particular asset. If a replacement for marketcap was sought after. But "dollars in over time" is not good enough, as it misses how liquidity can change at any moment, and misses the velocity of activity within any one crypto economy.
ChrisClark 5y ago
It's a good number to use if you are comparing different coins by value though. You need to know the circulating supply if you want to compare the price of each token.
kayamon 5y ago
Presumably one could multiply the mining effort put in so far by the energy prices at that time, to calculate total... uh... watt-dollars or something.
ianai 5y ago
Multiply the volume traded per day by the average strike price (or last strike price). Compare that to the total market cap.
deleted 5y ago
[deleted]
dorgo 5y ago
>is a silly metric because the entire market would never be able to cash-out at that maximum price. On the other hand, you can't buy all coins even if you pay the market cap..
tromp 5y ago
> What I was wondering was: is there a better number? e.g., is there a way to calculate the amount of USD put into a cryptocurrency across a timeframe? For PoW coins there is. For every day in the coin's price history, multiply said price by the number of newly mined coins that day, and sum over all days. Sadly, I don't know of any site that publishes such a metric, although the column "PoW Produced (24h)" of [1] shows the product of today's price and mined coins. [1] https://www.f2pool.com/coins https://www.f2pool.com/coins
- thinkmassive 5y ago
  CoinMetrics has done research in this area, for example Realized Capitalization: https://coinmetrics.io/realized-capitalization/ https://coinmetrics.io/realized-capitalization/
  - tromp 5y ago
    That one seems to correspond less to "money put in" though. As they note, just having Satoshi move his one million bitcoin would increase Realized Capitalization enormously, even though no new money is put in. Sum of daily price times daily emission on the other hand represents the total miner revenue; how much they would have made if they sold their mined coins as soon as possible (ignoring coinbase maturity for simplicity), which presumably upperbounds the total amount of money spent by miners on hardware and electricity.
    - thinkmassive 5y ago
      Good point, although your algorithm sounds more like it measures a lower bound on miner revenue, since it doesn’t account for miners who avoid selling their proceeds when they perceive the exchange rate to be too low. It also doesn’t account for future transactions of the same coins, so it doesn’t really address the entire market, only mining revenue. Realized Cap isn’t perfect but it seems like one of the most useful attempts at measuring market cap so far. Of course “usefulness” depends on the question you’re trying to answer. Other factors can be taken into account, like the Free Float Supply: https://coinmetrics.io/introducing-free-float-supply/ https://coinmetrics.io/introducing-free-float-supply/ Also keep in mind most of these calculations only consider on-chain transactions. Funds could be sitting unmoved on chain for years while being transacted many times per day on a second layer: Lightning Network, “wrapped” on another chain like Ethereum, or traded between participants on the same exchange.
cdiddy2 5y ago
I am late to this question but there is actually a method that really only works for cryptos. Its called realized cap. Multiply the each coin by the price at which it last moved and sum it all together. This gives a closer estimation of how much money is really in the system. It is not perfect but neither is mcap and this gets a bit closer. https://messari.io/charts/bitcoin/mcap-realized https://messari.io/charts/bitcoin/mcap-realized
- deleted 5y ago
  [deleted]
- thinkmassive 5y ago
  Realized Capitalization came from CoinMetrics. Many details in their original announcement: https://coinmetrics.io/realized-capitalization/ https://coinmetrics.io/realized-capitalization/
deleted 5y ago
[deleted]
modeless 5y ago
The really important metric isn't how much money has gone in, but how much money you can get out. You can actually calculate something related to this: take the order books of the large exchanges and add up the USD values of all the buy orders. Of course there's spoofing and dark pools and all sorts of other reasons why this is not exact, but as a first approximation it's better than market cap.
davidgerard 5y ago
The number that would actually tell you anything is movement of actual dollars in and out of an exchange and into and out of a XXX/USD trading pair that day. You're interested in flows, not specious headline-friendly marketing numbers. The trouble is that that information is basically not available.

jaggirs 5y ago

For every btc bought there is one sold, the equation you gave thus adds up to zero.

mrb 5y ago

The market cap metric may seem silly to you, but it's the same metric used by publicly traded corporations. And there is nothing silly about it. All shareholders would never be able to cash out at the current share price, but this isn't a reason to disregard the market cap metric.

acdha 5y ago
There’s a key difference: corporate shares have a value anchored in the company’s assets and revenue. The market cap can still fluctuate, of course, because different people will have different assessments of the future profitability but the floor is going to be based on the company’s assets, contracts and sales predictions, obligations, etc. In contrast, cryptocurrencies have no floor because there’s no inherent value to a random number and nobody has a need to pay for a specific token. If something falls out of favor, there’s no reason to expect to find a buyer at any price.
- nightski 5y ago
  Value is anchored in the equilibrium between supply and demand, that's it. Maybe the things you mention do drive that equilibrium. But I'd bet you'd have a hard time developing a profitable trading strategy based on those metrics alone. I know I have tried with little success.
- mrb 5y ago
  Corporations can still very much "fall out of flavor", driving their revenues and assets to zero. This criticism isn't only applicable to crypto. And cryptocurrencies' intrinsic value is this: they are payment networks that work even where traditional systems fail. No denied transactions. No limits. No "account" to open. Works for the underbanked. Send money truly anytime anywhere. No other system does this. That's the value. In the end, there is no fundamental difference between a service provided by a corporation vs a service provided by cryptocurrencies. Both services can and do have value.
  - acdha 5y ago
    > Corporations can still very much "fall out of flavor", driving their revenues and assets to zero. This criticism isn't only applicable to crypto. That's technically correct but missing the point: cryptocurrencies are an extreme outlier in that they have literally nothing other than social consensus backing them. If you look at examples of failing companies you will find a few cases of Theranos-level fraud but far more cases where a company was mismanaged into the ground but shareholders received _something_ and it's not common for this to happen so quickly that nobody had time to react. The more common trajectory is something like Sears or RIM where the writing was on the wall for years while the PE guys strip-mined the corpse or someone buys it to go patent-trolling, where a savvy investor has plenty of time to exit before the end and the people at the end still receive a fractional payout. > And cryptocurrencies' intrinsic value is this: they are payment networks that work even where traditional systems fail. No denied transactions. No limits. No "account" to open. Works for the underbanked. Send money truly anytime anywhere. No other system does this. That's the value. This is a good example of the problem: those claims are either completely untrue or significantly overstated but you have a significant financial interest in repeating them because being honest will imperil your ability to find someone willing to pay more for your random numbers than you paid originally.

secabeen 5y ago

I would extend this concept to all non-cash financial assets. All of what you wrote above applies to Tesla shares, or Ukrainian real estate, or anything that's not currency. It would still be incredibly useful, but it's also based so much on psychology, I don't know if there's a mathematical way to calculate it, like there was Black-Sholes for futures. A concrete calculation for this would revolutionize finance.

neuroma 5y ago
Agree, but, mind bender... this relationship also applies to currencies. A useful statistic is the volume transactions required to shift the price 2%, looking at an open order book. It gives you a notion of the available liquidity. It is liquidity that matters, as it allows influx and efflux without causing inelastic price movements.
Animats 5y ago
There's book value and price/earnings ratio. Valuation of operating companies is well understood. Buffett buys on that basis.

ludamad 5y ago

I like e.g. '2% liquidity depth' measure along with market cap, to show how steep the iceberg is if you start selling

davidgerard 5y ago
yep, this is the sort of number a crypto trader actually cares about. "Market cap" gives a crypto trader no usable information.

bigtunacan 5y ago

Overall, I enjoyed the analysis of the piece, but I disagree with their take on market cap. Amy Castor - "Yeah, market cap is a meaningless number. It assumes everyone bought at the current price and could cash out at the current price." We could just as easily apply that basic logic to any security. Amazon(AMZN) is ~3275 a share with a market cap of ~1.668T. That also assumes everyone could cash out at ~3275, but the reality is if selling pressure is higher than the buy side demand that selling shares will drive the price down as buyers would be able to continually bid lower. Eventually it would reach ~0 share price and effectively a 0 market cap. So in that sense token market cap is a fair equivalency. What makes a dollar worth a dollar? Crypto value at any given point in time is just an exchange value against fiat currencies. This isn't much different than an exchange value between USD and the Ruble; it will fluctuate.

FabHK 5y ago
> We could just as easily apply that basic logic to any security. Not quite. An Amazon share is a claim on future residual cash flows, whose net present value constitutes the (unknown) "true value" of the share. If Amazon falls to 1/10th of its current price because of some tweet by Elon or whatever other (extraneous, fluke) reason, lots of people would be lining up to buy it, because they get a stake in an actual business that would repay them their investment within a few years. So, no, it would not reach 0 share price. (So, while the argument in the article needs some refinement, its broad thrust is true: market cap for a publicly traded company is much more meaningful than market cap for a crypto currency.)
- nightski 5y ago
  In theory it sounds so logical! Is it though? Have you actually tried to apply this in practice to a trading strategy? I think once you start trying to predict prices based on NPV of future cash flows this quickly falls apart, even with large behemoths like Microsoft, Apple, etc...
  - FabHK 5y ago
    I am not suggesting that you or I can compute the NPV of future cash flows and then value the share, certainly not easily. But that was not the point. The point was to distinguish shares (and other securities) from coins: the price of the former is (softly) constrained to be within the vicinity of their intrinsic value. Cryptos have zero intrinsic value.

vmception 5y ago

> What I was wondering was: is there a better number? e.g., is there a way to calculate the amount of USD put into a cryptocurrency across a timeframe? Velocity is a very important factor that critics of asset-wealth ignore. When it comes to criticizing crypto-assets specifically, people just turn their brain off or are completely ignorant to how assets they respect work in order to hold crypto-assets up to a fictional higher standard. but even when articulating their standard its like "do they even know what they're talking about?" for example, when comparing crypto assets to currencies, due to the "cryptocurrency" misnomer and skeumorph in the name, the illiquidity and relative few transactions in comparison to the marketcap seems like an important area to focus on, to them, while completely missing that currencies are broken down into 4 segments for this exact same reason. M1 being that tiny sliver used for transactions with M2 and beyond being illiquid allocations of the currency, the similarity of behavior ironically bolsters the currency aspect of crypto in what was supposed to be a criticism. Many of these criticisms focus on the conversion to a fiat currency, and neglect the ability and reality of acquiring goods and services and investments directly with the crypto. I see something like this over and over again. These all factor into how one would go about valuing any particular asset. If a replacement for marketcap was sought after. But "dollars in over time" is not good enough, as it misses how liquidity can change at any moment, and misses the velocity of activity within any one crypto economy.

ChrisClark 5y ago

It's a good number to use if you are comparing different coins by value though. You need to know the circulating supply if you want to compare the price of each token.

kayamon 5y ago

Presumably one could multiply the mining effort put in so far by the energy prices at that time, to calculate total... uh... watt-dollars or something.

ianai 5y ago

Multiply the volume traded per day by the average strike price (or last strike price). Compare that to the total market cap.

deleted 5y ago

[deleted]

dorgo 5y ago

>is a silly metric because the entire market would never be able to cash-out at that maximum price. On the other hand, you can't buy all coins even if you pay the market cap..

tromp 5y ago

> What I was wondering was: is there a better number? e.g., is there a way to calculate the amount of USD put into a cryptocurrency across a timeframe? For PoW coins there is. For every day in the coin's price history, multiply said price by the number of newly mined coins that day, and sum over all days. Sadly, I don't know of any site that publishes such a metric, although the column "PoW Produced (24h)" of [1] shows the product of today's price and mined coins. [1] https://www.f2pool.com/coins https://www.f2pool.com/coins

thinkmassive 5y ago
CoinMetrics has done research in this area, for example Realized Capitalization: https://coinmetrics.io/realized-capitalization/ https://coinmetrics.io/realized-capitalization/
- tromp 5y ago
  That one seems to correspond less to "money put in" though. As they note, just having Satoshi move his one million bitcoin would increase Realized Capitalization enormously, even though no new money is put in. Sum of daily price times daily emission on the other hand represents the total miner revenue; how much they would have made if they sold their mined coins as soon as possible (ignoring coinbase maturity for simplicity), which presumably upperbounds the total amount of money spent by miners on hardware and electricity.
  - thinkmassive 5y ago
    Good point, although your algorithm sounds more like it measures a lower bound on miner revenue, since it doesn’t account for miners who avoid selling their proceeds when they perceive the exchange rate to be too low. It also doesn’t account for future transactions of the same coins, so it doesn’t really address the entire market, only mining revenue. Realized Cap isn’t perfect but it seems like one of the most useful attempts at measuring market cap so far. Of course “usefulness” depends on the question you’re trying to answer. Other factors can be taken into account, like the Free Float Supply: https://coinmetrics.io/introducing-free-float-supply/ https://coinmetrics.io/introducing-free-float-supply/ Also keep in mind most of these calculations only consider on-chain transactions. Funds could be sitting unmoved on chain for years while being transacted many times per day on a second layer: Lightning Network, “wrapped” on another chain like Ethereum, or traded between participants on the same exchange.

cdiddy2 5y ago

I am late to this question but there is actually a method that really only works for cryptos. Its called realized cap. Multiply the each coin by the price at which it last moved and sum it all together. This gives a closer estimation of how much money is really in the system. It is not perfect but neither is mcap and this gets a bit closer. https://messari.io/charts/bitcoin/mcap-realized https://messari.io/charts/bitcoin/mcap-realized

deleted 5y ago
[deleted]
thinkmassive 5y ago
Realized Capitalization came from CoinMetrics. Many details in their original announcement: https://coinmetrics.io/realized-capitalization/ https://coinmetrics.io/realized-capitalization/

deleted 5y ago

[deleted]

modeless 5y ago

The really important metric isn't how much money has gone in, but how much money you can get out. You can actually calculate something related to this: take the order books of the large exchanges and add up the USD values of all the buy orders. Of course there's spoofing and dark pools and all sorts of other reasons why this is not exact, but as a first approximation it's better than market cap.

davidgerard 5y ago

The number that would actually tell you anything is movement of actual dollars in and out of an exchange and into and out of a XXX/USD trading pair that day. You're interested in flows, not specious headline-friendly marketing numbers. The trouble is that that information is basically not available.