Market value under scrutiny


With the recent sharp rise in the price of Bitcoin, but also of the crypto market as a whole, there is often talk of market capitalization (aka: market cap ) as an indicator of how big, successful or valuable an asset is. In Dutch we speak of the total market value. In this article we discuss market value as an indicator, and why it is not always reliable.

The total market value of a commodity, such as Bitcoin, is calculated by multiplying the number of units (tokens) in circulation by the current value of a single unit of the commodity. In the case of Bitcoin, at the time of writing this is as follows: 16,311,862 BTC x ?????1,430 = ?????23,325,962,660. With Bitcoin, the market value, compared to some other cryptocurrencies, gives a fairly good idea of the value that is represented. Bitcoin could be mined publicly from the start, without a fixed number of bitcoins being withheld by the developer beforehand.

The developers of some cryptocurrencies withhold part of the tokens, often to support the developers financially. When this happens, these tokens are counted with the total amount of available tokens, while they do not actually participate in the market. A lower number of tokens available on the market often leads to a higher price, which can therefore give a distorted picture in total market value.

A recent example where a clearly distorted picture has emerged is the pre-sale of Gnosis, a token for a prediction market that is built on Ethereum. The pre-sale was held to give early investors a chance to support the development of the project and later sell the shares profitably.

At the Gnosis pre-sale, only 4.17% of the total number of available tokens was sold to the public, the remaining 95.83% remains in the hands of the developers. $31.25 was paid for each token of the 4.17% sold. Eventually, 10 million tokens will be available. As a result, the market value of Gnosis is set at $312.5 million, while only about $13 million has been raised at a price of $1.30 per token. The total market value therefore gives a considerably distorted picture of the real underlying value.

The context is essential. For a good determination of the underlying value of a good, it is important to study a multitude of different variables: the total of ultimately available tokens and inflation, the liquidity on the markets, the total trading volume, the quality of the development of the technology and the developers, the activity on GitHub, pre-mining, and so on.

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