A Wall Between Investor and the Unimaginably Stupid
If you’re a cryptocurrency old-timer, things that annoy you will become popular for reasons that seem unimaginably stupid. If you were a musician in 2012 and competing for the #1 spot on YouTube, it didn’t matter if you were the best singer in the world if your competition was “Oppa Gangnam Style”. In the same way, it won’t matter if your cryptocurrency is the most sophisticated and decentralized in the world, if the market doesn’t value those characteristics.
The “Gangnam Style” Era of Crypto
To explain what I mean, I’ve analyzed the percentage gains of each of the top 27 coins by market cap since 2017. One thing that is clear to me is that the cryptocurrency characteristic the market favored more than anything else in 2017 was not so much decentralization, technological soundness or real world usage, but rather the dollar digit bracket the coin belonged to; in this case, sub-cent unit prices.
Of course, the unit price of a coin is a totally senseless basis for making investment choices on. Any cryptocurrency–even Bitcoin–could have been a sub-cent item, if Satoshi chose the final cap to be 21 quadrillion instead of 21 million. In that case, the unit price of a bitcoin (price per each whole bitcoin) would be $0.00001697 right now instead of $16,790 but the total market cap would still have been $284 billion. Everything would be the same, except that everyone would have a million times more bitcoin–and the unit price would be cheaper.
Since bitcoins (as well as many other cryptocurrencies) are divisible down to 10^8 satoshis (smaller units), it doesn’t really matter what the supply is, as long as there’s enough “particles” of the currency to go around for the economic use cases imagined to function properly. The number itself is not important. But it does directly effect the unit prices, which apparently has an enormous impact of the investment choices of mainstream investors. As stupid as it may seem, I contend that apart from what’s outlined in this great summary, the perceived “cheapness” of Ripple’s XRP (100 billion supply) is one of the reasons why it overtook Bitcoin as the largest cryptocurrency in the world by implied market cap this week.
Ripple $XRP last night overtook Bitcoin $BTC as the largest cryptocurrency by fully diluted market cap. Further to my tweet a few weeks ago – I’d be very cautious in the space. #dashfortrash pic.twitter.com/qbIorRfMES
— Leon Warburton (@Leon_Warburton) January 4, 2018
The reason why we look at market caps when we compare coins is because that’s how we compare the values of a cryptocurrency as a whole rather than just looking at the unit prices, which we know, as illustrated before, to be completely arbitrary and therefore not a good measure of anything. To visualize this is in the clearest way possible, we can normalize the supply for different altcoins to see what the prices really would look like if they all had the same supply. This is how they would compare (as of 5 Jan 2017):
Another interesting aspect to look at is how many units of each altcoin you need to hold to own the equivalent of 1 bitcoin of that coin:
In these tables, I’m using the “fully diluted market cap” (max supply) as a basis for the normalization. The currencies for which the max supply is unknown such as Ethereum, I’ve used the Y2050 estimations given by Onchainfx(*). The calculation I’ve used for the normalization table is as follows:
Altcoin price x Altcoin max cap / 21M
And the bitcoin equivalent altcoin holding amounts:
Altcoin max cap / 21M
I recommend always doing this when trying to gauge the relative value of a coin to bitcoin for long-term investments. In my opinion, it’s better than looking at unit prices or market caps based on circulating supply, because it’s the only way to correctly assess the actual valuation you’re giving a coin when buying.
I think the easiest way to understand what I mean is by looking at Zcash as an example.
Zcash’s supply when all coins are mined will be the same as bitcoin, 21 million, but currently, there’s only ~3 million mined (circulating supply). As such, when you’re looking at sites like Coinmarketcap, it will tell you that Zcash has a market cap of just $1.7 billion. That’s just 0.6% of bitcoins market cap and places Zcash far down the list, at #27 where it looks small and leaves much room for growth.
But the price of Zcash is $589 which is actually 3.5% of bitcoin’s $16,790. If you’re buying with bitcoin, that means you have to pay 0.035 bitcoin to buy Zcash. Another thing you have to factor in when buying Zcash at $589 is that in order for Zcash to actually keep that price over time, Zcash must amass a market cap of $12bn, climbing to what’s currently the 12th spot on Coinmarketcap. And even if Zcash were to somehow do that, you would still only break even on your investment–because you bought it at a price ($589) that implied a valuation of $12bn. That’s the reason why the Onchainfx site is listing the coins the way they are–because it tells us what the implied valuation are for coins when bought at current prices.
Unfortunately, using the slightly deceitful metric “circulating supply” seems to be the norm when comparing valuations in the crypto-space. In a recent example, the Twitter-user @boxmining shared a tweet where he showed a similar supply-normalized valuation as mine but based off of circulating supply:
Removing Unit Bias. If everything had the same supply cap as Bitcoin, would you still buy it? pic.twitter.com/0xrDiytPzR
— boxmining (@boxmining) January 5, 2018
With this tweet he got the key message across – at the time, the implied valuation of XRP valued it above bitcoin. But if we look carefully, we’ll see Zcash at #28 on that list, with the deceitful price tag of $105, implying that the relative price of Zcash to Bitcoin is 0.6%, when as we know in reality, you have to pay 0.035 bitcoins (3.5% for a Zcash).
The point I want to make is that you can get far in your ambitions to become a more informed trader than most people in the market just by using common sense and a calculator. But being able to properly compare coin valuations doesn’t matter if nobody else is doing it — at least not in the short term. It can take a long time before the market fundamentals eventually force these prices to sort themselves out. And until they do, I recommend you do your diligence to make sure you’re on the right side of that correction.
(*) For Qtum, Onchainfx estimates the Y2050 supply to be 100 billion, which is erroneous. Speaking to one of the Qtum developers, David Jaenson, I confirmed this number to instead be 107822406.25.