The “Market Capitalization” Of Cryptocurrencies

As I recently explained to a colleague, the “market capitalization” of Bitcoin and other cryptocurrencies is a fiction: It is calculated by multiplying the number of coins in existence with the current market price and does NOT mean that people actually payed this amount of money into acquiring said coins.

Even if they did – they would simply have bought the coin from someone else, meaning, Dollars go in and out of the cryptocurrency at an even rate. There is not ONE Dollar “behind” a cryptocurrency.

Imagine this: There is a billion “coins” trading at one Dollar per coin. Now I offer you 1.10 Dollar for one and you happily sell it. We do this trade on a coin exchange. The coin exchange notes down the new market price: 1.10 Dollar. Now all of the coins taken together are worth 1.1 billion Dollar at this new price.

JPMorgan now did a calculation stating that 6 billion inflow of USD over the history of bitcoin have led to a “market capitalization” of Bitcoin of 300 bn USD.

“contrary to expectations that bitcoin’s market cap is a rough reflection of its inflows, JPM’s calculations reveal that a mere $6 billion in net inflows since 2009 has resulted in a market cap of $330 billion. “

Well, I don’t know exactly what they mean by “inflow” because the money (the Dollars) always goes to someone else. But anyway, JPMorgan and I largely agree. There AIN’T NO 300 billion there.

Does this mean it will all go poof tomorrow? Maybe or maybe not. Cryptocurrencies do have a utility value as a means for transactions. But, Bitcoin is not particularly good at that – the blockchain limits transactions worldwide to 8 per second.

Instead of a single chain of transactions you can do a network, a so called DAG of transactions, such a system is then called a distributed ledger. Two examples are Ethereum and IOTA. They scale up with the number of connected nodes so there cannot be a transaction bottleneck.

Well if that was all mumbo jumbo to you, just google around for the terms and maybe you’ll find explanations that give you an idea. I’m just saying, Bitcoin was the first attempt at creating a cryptocurrency and it will in my opinion be superseeded. WHEN this will happen is anyone’s guess. If you buy Bitcoin, just remember: The fall will be drastic because there is no underlying backing besides its utility value.

If and when users get convinced that another crypto system offers higher utility value – in other words, as soon as the masses GET the argument about distributed ledgers – a giant air pocket will open and you won’t be able to get out of your Bitcoin investment at any price reasonably close to what you just saw on your computer screen: You will be stuck in the queue of everyone else trying to sell at the same time.



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