The Myth of Market Cap

[galgitron]

Here I hope to highlight the complete fallacy of using the Market Cap for anything useful, particularly predicting future maximums, or even as a cross-crypto comparative tool.  

Disclaimer: As always, all of this is my opinion, so if you take issue with any of my statements, find the data to refute me, but don't expect me to 'jump' to your commands of 'prove it'.

First, what is the definition of Market Cap?  It's: (number of coins) TIMES (current price per coin)

That's it.  This simple formula, probably because of its simplicity, has lead to a rabid adoption by the general masses as some form of meaningful indicator.  No serious investor acknowledges this sensationalist figure for technical analysis purposes, with perhaps the exception of its psychological effects on inexperienced traders.  

At this time, it's arguable that most of the money that sits in crypto is speculative, meaning investors hoping for the value to increase, as opposed to actually using the coin for transfer of value (purchases, etc.).  This pool of speculative investor money is approaching maturity in that the cat is out of the bag for the most part so most potential crypto investors have already positioned themselves in the market, thus the early phenomenal historical gains of the past years, are unlikely to be reproduced by speculation money alone, simply because those gains were mostly due to the increasing awareness of crypto.  Therefore, the pool of crypto value, while still growing substantically and crypto investing continues its mainstream adoption, isn't going to grow exponentially until a categorically new infusion of wealth presents itself.  For the time being, this only really leaves opportunity for speculator sentiment to 'shift' wealth to the latest and greatest crypto, but the total real wealth increase has slowed.

Back to Market Cap.  I wish to dispel the two notions I mentioned earlier:

1) Myth: Each coin's Market Cap can be used to compare against each other

The problem with the Market Cap formula is it attempts to answer a very complex question with too few variables; that question being, "what is the relative value of this coin to its maximum value?"  Tricky question, because few people ask the question, "what decides the maximum value?"  Time and time again, many people will erroneously use the leading coin's (Bitcoin) market cap as some sort of indicator of maximum market cap value for any other coin.  How does this make any sense?  Particularly if the coins are for completely different use cases.  Why does Bitcoin's market cap have any relevance to Ethereum's, or Ripple's?  Well, it doesn't, whatsoever; but, this is the psychological barrier put in place, presumably from instinctual impetus given that we see Bitcoin all grown up, so Bitcoin's siblings can't get much bigger right?  They're not kids, so the first step to clearing the nonsense of Market Cap from your mind, is that one coin's market cap has anything to do with another coin's, for the same reason your kid went to college while the neighbor's kid smoked pot all day.

2) Myth: Market Cap can be used to predict maximum value

Here's the really tricky part, and will form the remainder of this explanation.  First, these are the important data points that need to be considered:

- The maximum total of coins that will ever exist
- The number of destroyed coins
- The total coins currently in existence
- The number of hoarded/locked coins
- The number of utilized/circulated coins (this includes active trading)
- The maximum value of market penetration (SWIFT market, retail market, lending, etc.)

All play a part in the current value of a coin.  Without using all these factors involved in calculating the potential maximum price for a coin, you end up with gibberish, so let's try to put some real values at work for Ripple.  These figures are very very rough, just to demonstrate their relationship, not actually predict a value.

maximum that will ever exist: 100 billion
destroyed coins: a few million
currently existing : 100 billion (minus a few million destroyed coins)
hoarded coins: 55 billion in lockup, billions more remaining in Ripple, Inc. another presumably 25 billion held by investors and FI's in hodl psychosis.  Say the total is 95 billion.
utilized coins: (currently existing) MINUS (hoarded/locked coins).  Plugging in numbers: 100 billion - destroyed coins - hoarded/locked coins EQUALS APPROX 5 billion
maximum value of market penetration at any one moment: say $1 billion for our current active traders

Couple things I wish to point out here.  First, why would I say $1 billion market penetration when billions can trade in a single day on exchanges?  Well, if I give you $20, and you give me back $20, do I have $40 bucks now?  No, of course not.  That's why you have to pick a point in time that asks, how much XRP is being utilized for a purpose at this exact second, similarly to how an exchange determines value, point in time.  That's why I chose $1 billion (a completely subjective number of course, plug in whatever you want).

Second, the last parameter "market penetration" MUST be entirely compensated for by the total value of all the "utilized coins" simply because inactive/destroyed/locked coins don't contribute to the facilitating of the market penetration, only the utilized coins can do that.  In other words, none of the other values matter.  Therefore, the value of XRP = (market penetration) DIVIDED BY (# of utilized coins).  In real numbers: $1 billion DIVIDED BY 5 billion coins = 0.20 cents per coin.  Coincidence??  (Not really, I massaged the numbers of course).

What does this all mean for market cap?  

Who gives a damn what 100 billion total coins TIMES 20 cents equals, it's meaningless.  The value of XRP only depends on the market penetration and the number of coins that can be utilized.  That's it.  The meaningful calculation for coin cap valuation can only be 5 billion * 20 cents = $1 billion dollars (again, plug in your own numbers), a far cry from the insane $9 billion bloated figure everyone is using.

Now that we've eliminated the gross exaggeration of XRP market cap, the even trickier part becomes determining market penetration maximums.  It's easy to say, well, SWIFT transfers trillions of dollars per year.  So what!  It's completely irrelevant what happens over a year.  What is relevant is how much money is in transit at any given point in time.  Let's say $500 million for fun.  That means if SWIFT was replaced with XRP, then at any given moment, $500 million worth of XRP would be in use.  This would add further demand on the 5 billion utilized coins, so add $500 million DIVIDED BY 5 billion utilized coins = 10 cents to XRP's value, for a total of 30 cents.  Not what you were hoping for?  But wait, there's more...

Replacing SWIFT in my mind, is a credibility strategy by Ripple, not necessarily its golden egg.  Once XRP gets this exposure, it will have its foot in the door and XRP will rapidly cascade into literally every other use case (of which there are infinite) that money itself currently faciilties, and at the same time radically accelerating each of those paradigms, and creating so many new ones we have yet to conceive because old-fashioned money couldn't support new ideas.  Let's look at a few others:

RETAIL: Who wouldn't want to aim their smartphone camera at an on-screen QR code at the cash register, and then be done.  No more credit cards, no more remembering dozens of PINs and passwords, no more trying to re-activate your credit card from suspected fraudulent activity because the banks are knee-jerking at your irregular purchase of a smoothie.  To hell with banks.  Click, done.  Gazillions of dollars.  This is a much larger market than SWIFT in my opinion, solely based on the frequency of transactions that will require much more overall XRP to be in flight at any given moment.  VISA, the writing is on the wall buddy...

ADOPTION: Imagine when people, businesses, governments even, stop always converting back to fiat and just staying in XRP.  This becomes the 'currency flight' turning point, and valuation will go into the hundreds to billions (DIVIDED by the number of utilized coins).  Multiple dollars per coin.  EDIT: a lot of people misunderstand this statement as replacing fiat altogether,  that's not where I was going with it.  It just means they are increasingly using it, and it just makes sense to hang onto XRP instead of quickly in-and-out

LENDING: Here's where solid figures go out the door.  With solid reserve lending laws already in place, and if adoption is widespread, more and more XRP will be needed, and that need magnified by the banks tendency to lend wealth they don't actually have (mortgages?  CDOs anyone?).  

INVESTING:  If you think lending is big, how about the huge margin investing that we've seen in investment firms.  It get's maniacal

EMERGING COMMERCE:  Micropayments, robotic payments, and completely unknown revenue streams that couldn't exist without XRP, much like Uber couldn't exist without smartphones.

SPECULATION:  Riding on top of it all, there are people that understand the above, and will be in early, and accordingly the price will ride the speculative bubble before these ideas are set in stone, so theoretically, the price of XRP will perpetually be artificially inflated in anticipation of its eventual justification as the new markets embrace it.

Suffice it to say, that the demand for XRP can easily eek into the trillions, even quadrillions, which DIVIDED by 5 billion, is many thousands of dollars per XRP.  

However dreamy and seemingly impossible these figures appear, that my friends is the potential market for XRP, beyond comprehension.  So take your market cap and toss it in the garbage where it belongs.  Will it hit any of these values?  Who knows.. but what's important to recognize is that XRP doesn't answer to stupidity like: A TIMES B EQUALS Maximum, nor does it answer to Bitcoin, or SWIFT, or even the entire wealth of the world; it makes its own value.
 

Yes, I meant 'rabid'

Edited November 19, 2017 by galgitron

[zenkert]

24 minutes ago, galgitron said:

Why does Bitcoin's market cap have any relevance to Ethereum's, or Ripple's?  Well, it doesn't, whatsoever; but, this is the psychological barrier put in place, presumably from instinctual impetus given that we see Bitcoin all grown up, so Bitcoin's siblings can't get much bigger right?  They're not kids, so the first step to clearing the nonsense of Market Cap from your mind, is that one coin's market cap has anything to do with another coin's, for the same reason your kid went to college while the neighbor's kid smoked pot all day.

Very interesting Read All in All.
Have to read it at least 2-3 times again, to get the whole Picture.

But for the moment after a quick scan reading.
I found the above qouted true and I did LOL.
And furthermore a laugh, makes one think in a serious matter like this, it´s an eye opener.

Cheers

Edited October 6, 2017 by zenkert

[xp3215233]

While I fully agree with you on market cap being useless for cryptos, the rest of this is sci-fi

[galgitron]

43 minutes ago, bm32533476 said:

While I fully agree with you on market cap being useless for cryptos, the rest of this is sci-fi

Absolutely, belligerent sci-fi.  But it highlights the point that there's no maximum market penetration and hence nothing stopping XRP from climbing where it wants

[Sancho]

Thanks for your insight and explanation! I have to admit I also had some doubts in how high XRP can climb in relation to the market cap. But I perceive it differently now and also think the cap should have no influence in value evolution.

I do think the total amount of XRP thus market cap is probably still an important factor holding back a lot of potential investors. Getting these to understand this better could mean we will have a lot more members joining our XRP club?.

[snub-fighter]

54 minutes ago, bm32533476 said:

While I fully agree with you on market cap being useless for cryptos, the rest of this is sci-fi

sci-fi.....yeah that stuff could never happen. 

Tractor beams

Light could also help replicate another interesting technology from the "Star Wars" franchise: the tractor beam, which is an invisible energy field that can grab, trap and move objects. Since the early 2010s, scientists have been creating lasers with unusual beam-intensity profiles that allow them to attract and repulse tiny particles.

Just last year, researchers from the Australian National University broke the distance record for tractor beams by using a doughnut-shaped laser to drag hollow, glass spheres for up to 7.8 inches (20 centimeters), roughly 100 times further than in previous experiments.

And just a couple months ago, a team from the University of Bristol, in the United Kingdom, showed that sound could rival light as the source of future tractor beams. The researchers used a precisely timed sequence of sound waves from an array of tiny loudspeakers to create a region of low pressure that effectively counteracts gravity, levitating tiny balls of polystyrene in midair. The balls could then be pulled, pushed and spun using only sound waves.

[galgitron]

11 minutes ago, Sancho said:

I do think the total amount of XRP thus market cap is probably still an important factor holding back a lot of potential investors. Getting these to understand this better could mean we will have a lot more members joining our XRP club?.

Absolutely.  In fact, I predict that there's some big investors waiting for the 55 B lockup to actually occur before they get in.  This would cement the number of "utilized" coins to a small number so that these investors know their money isn't going to be stolen from them overnight.  The lockup is irrelevant to most investors, but to a whale with a lot to lose, it's everything.

[zenkert]

One Ponders.

Mainstream Media always refer to crypto as either Bitcoin or Ethereum.
Just pick any magazine, on-line or not.
Just read a Forbes article online.
Crypto = Bitcoin or it´s Litttle Brother - Ethereum.

Naturally of course, since they are for the moment the most valuable cryptos vs FIAT-currencys.

So Ripple is still, more or less under the Radar.
Which in a way, are holding back the Real Players.
And for the Common People, they only heard of Bitcoin.
 - Yeah, I wish a jumped that train, I would have been Rich now.
Ever heard that before?

Once XRP makes some sort of an Impact that attracts Mainstream Media.
We´re in for one hell of ride

Cheers

 

Edited October 6, 2017 by zenkert

[Tommynoguns]

I have been reading this forum for two months without signing up or posting...but I felt I had to say thank you. Brilliant post. Thanks for writing it. 

[Guest]

@galgitron, like me, I think you can probably rub people the wrong way with some of your posts. 

But I enjoy reading your thoughts, and this was definitely the case with this post.  In my opinion, you completely rebutted people who go around espousing: "unless x, y, and z happen, XRP will never be able to reach $x in price."  As you pointed out, we have no idea how things are going to turn out.

Well done and thank you!

[Hodlezerper]

I have to say, much of this is riddled with risky assumptions and little recognition of your own logic. At best its frustrating, at worst its nefarious and mis-leading. 

You are correct about points 1 and 2. No question. Market Cap is a term for "Market Capitalization". It is not meant to refer to a cap as a limit. People generally use it as a term for the value of the asset based on the current single unit market value. It is, as you say, as simple as that. 

You are also correct about attempting to form a relationship between important aspects of the asset including available units, hoarded units, locked up units, etc...Ironically, you don't actually apply any meaningful utility of those aspects in your example of pricing the unit. For instance, you use the word "market penetration", which could conceivably change based on escrow rules, contract law, decision to no longer "hodl". Any combination of these potential realities must play into the price or "future market cap" of the asset. Again, please note when many people say "market cap" they're simply referring to the current theoretical value of the asset as a whole. Not a cap, or limit. 

So, to come up with a sound analyzation for the "market cap" or "price", one must factor in all of these potentialities to the best of his or her knowledge. Much of this is based on risky and safe assumptions. For instance, it is a safe to assume that once the 55 billion XRP go into lockup, we will only ever have a maximum influx of XRP hitting the market to be numbered at 1 Billion per month. It would be a risky assumption to think that @JoelKatz will dump all of his XRP next year due to previous personal debts. We have no idea what his financial situation is and so can't assume what he's going to do with his held asset. Furthermore we don't know what outstanding contracts he may be involved in that limit his ability to sell the asset (Sorry @JoelKatz, just using you as an example here). Even farther down the rabbit hole, we don't even know how or when Ripple might sell the 1 Billion XRP they have access to. Could it be on a market? Could it be a private sale? Who knows? Nobody... So, we can't reliably price in things we can't possibly know. We actually continue to value the asset at current market price multiplied by outstanding units. Ripple even does so on their own website. Their market cap is market price multiplied by 100 billion. That is the only reasonable assumption.

Continuing further down the path of irony, you make the totally and admittedly arbitrary number of 1 Billion as market penetration based on how much value is being sent through it again and again. The reason this is ironic is that this is the exact metric many people are using to try to find out a "market cap" or, "value" of the asset based upon its actual use case. In this case, cross border currency bridging. There are much more advanced articles written on this topic and I won't even attempt to approach that here. 

Furthermore there are not "infinite" use cases. That is preposterous. You are either ignorant or lying because you don't seem stupid. Just because we can't conceive of exactly how the future will go does not mean that the use cases for XRP are infinite. That is wholly irresponsible and mis-leading. If there are people out there who are a little cautious about that part, you should be. It's insane. This is someone closing their eyes and throwing a hail mary and screaming "anything is possible! I believe!". And what does "old fashioned money couldn't support new ideas" even mean? Sure, new businesses will likely start due to technology breaking down financial barriers, but XRP isn't going to somehow send us into the next evolution of our genetic identity. We're still humans. We're doing the same thing we did before just faster and cheaper.

Look, we live in a world of limits, laws, regulations, and politics. We can't get around that. A digital asset won't break those barriers down. We have to do that as people living within a system created by our own fears and limitations. You aren't considering anything here based on what laws currently exist or how central banks and governments' monetary policy may affect the use of an asset like XRP. 

Lending? Margin investing? Emerging commerce? What? What about digital currency issued by respective central banks? I'd be more akin to saying those types of coins will be used in "micropayments" or "lending". Who is going to pay off their loan in XRP? Many people are still taxed at respective capital gains rates for selling the asset at a profit. Nobody is going to use XRP for day to day domestic payments. We all have a national currency for that...The fed is currently working on creating a system that facilitates instant domestic payment and settlement. What does that have to do with XRP? Nothing, as far as I can tell. Please enlighten me if I have missed something so important as XRP being used in domestic payments. Dollars, Pesos, Yuan..those will be used domestically as they will be the only recognized currencies of a respective country. 

XRP's market cap (value) will be wholly dependent upon the success of its use case as dictated by rules, regulations and global economic prosperity. There are absolutely limits on what XRP could do when it comes to price. Nobody can accurately predict that right now, that's for sure. But it is most definitely not "infinite". Certainly I would be ridiculed if I were to assert that XRP could somehow be worth more than all value on Earth...

When determining the market cap (value) of XRP as a digital asset we must be able to reasonably calculate vastly complex and unpredictable aspects of global finance, domestic politics, geo-political instability, potential of company leadership, etc.. etc.. the list goes on and on and on and on. 

But it will most absolutely be limited to its use-case when it comes to value. Can that value fluctuate a bit. Of course it can. But it will not be worth more than the value it adds to the global market place. And for XRP that'll be relative to how much value must transfer through it across borders based on competition, politics, regulations, supply, and demand. 

For reference, here is the only sound analysis I've ever read based on XRP prices based on current understood realities. This article written is about a floor value. Meaning, the lowest this person thinks it could be, given his assumptions prove to be correct. 

http://cryptoizzy.blogspot.com/2017/05/xrp-valuation.html

 

 

[galgitron]

1 hour ago, Sebastian said:

@galgitron, like me, I think you can probably rub people the wrong way with some of your posts. 

Story of my life, lol.  I never intend to offend, but if I trip over other people's sensitivities,  tough ****

1 hour ago, Sebastian said:

Well done and thank you!

[Guest]

20 hours ago, Hodlezerper said:

For reference, here is the only sound analysis I've ever read based on XRP prices based on current understood realities. This article written is about a floor value. Meaning, the lowest this person thinks it could be, given his assumptions prove to be correct. 

http://cryptoizzy.blogspot.com/2017/05/xrp-valuation.html

This is one of the first one I came across.  I found it too limiting because it provides as you said an analysis of "current understood realities."

The reason I like @galgitron's analysis so much is not because I believe the sky is the limit, but because it is one of the few analysis I have seen that recognizes we are in uncharted territory.

JoelKatz has provided his viewpoint on XRP price on more than one occasion.  His viewpoints are in between the link you provided and @galgitron's.

https://www.reddit.com/r/Ripple/comments/73lzmc/the_informed_speculator_making_an_attempt_to/

https://www.reddit.com/r/Ripple/comments/6irqhs/mathematically_speaking_what_is_the_highest_price/

https://www.xrpchat.com/topic/7902-speculation-faqs/

Edited October 8, 2017 by Guest

[Hodlezerper]

Just now, Sebastian said:

This is one of the first one I came across.  I found it too limiting because it provides as you said an analysis of "current understood realities."

The reason I like @galgitron's analysis so much is not because I believe the sky is the limit, but because it is one of the few analysis I have seen that recognizes we are in uncharted territory.

JoelKatz has provided his viewpoint on XRP price on more than one occasion.  His viewpoints are in between the link you provided and @galgitron's.

https://www.reddit.com/r/Ripple/comments/73lzmc/the_informed_speculator_making_an_attempt_to/

https://www.reddit.com/r/Ripple/comments/6irqhs/mathematically_speaking_what_is_the_highest_price/

 

Fair enough...

The potential goal posts are really far apart right now, that's for sure. And anyone who claims they can predict anything except a base level projection is disingenuous. 

That being said, I get fired up on this stuff because we must be very careful not to plant the wrong seeds in the inquiring minds. 

If we can prevent even one person from spending money they can't afford to lose by preventing their understanding from saying "The price is virtually limitless!" then we've done our jobs. 

All I ask for is critical thought and tough discourse. 

And in regards to JoelKatz assessment, he is doing precisely what I mentioned in regards to coming up with a price based on a use case. That is much different than saying "The value is infinite.".

Please, someone call me when XRP reaches infinity. 

[Guest]

I agree people should not invest more than they can lose.

The only other thing I would add is the markets are not entirely priced on actual utility but a combination of actual and potential utility. 

For example, presumably the reason Tesla's market cap is larger than Ford's and 10% less than GM's is because investors see great potential in Tesla.

• GE Market Cap: 65.47B
• Tesla Market Cap: 59.56B
• Ford Market Cap: 48.89B

Edited October 7, 2017 by Guest