Shining A Light On Crypto Market Capitalization

Cryptocurrency Bitcoin

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In an effort to demystify crypto for mainstream audiences, the industry appropriates terms from traditional finance. For instance, lending firms such as BlockFi, Gemini, FTX and plenty of others used words such as yield or interest in marketing materials in an effort to convince investors that depositing assets in these platforms were akin to banking savings accounts.

Granted, this may not be the most favorable example given the current state of these firms, but the assimilation of traditional financial jargon into crypto does not have to be a bad thing. However, it does require you to understand these key terms and how their usage differs between crypto and theTrad-Fi world.

This article will focus on the term market capitalization, often abbreviated to market cap.

Defining Market Cap

A simple definition for market cap is the value of all outstanding shares by the current share price. So as an example, if Company A had 10 million outstanding shares trading at a price of $20 each, its market cap would be $200 million.

Top 10 Cryptos by Market Cap

Messari

Because crypto assets trade 24/7/365, the industry has adopted market cap as a way to track the value of various assets. For instance, as of this writing bitcoin’s (BTC) market cap is approximately $444 billion. We get to this number by multiplying the price of bitcoin– $23,003–by the total number of bitcoins created, approximately 19.1 million. We can repeat this function for every asset. For instance, ether (ETH
ETH
) has a market cap of $196 billion. The total market cap of all crypto assets is $1.06 trillion according to calculations done by Messari.

It seems simple enough, but there are some important distinctions that need to be made. For instance, with the exception of bitcoin and ether, many of these tokens are backed by for-profit driven entities whose equity ownership is privately held. These shares, which are not freely tradeable can have dramatically different values than the total value of outstanding digital assets. For example, the value of all outstanding tether (USDT) and USD coin (USDC
USDC
) is $67.1 billion and $43.77 billion, respectively. Does this mean that those companies are worth that much money? Of course not because these tokens do NOT represent ownership in the companies behind these coins. Before Circle (the USD Coin issuer) canceled its SPAC deal, the firm itself was going to go public with a $9 billion valuation.

Now, although there is some debate regarding whether some stablecoins could be considered securities, many investors are likely buying USDT or USDC to get a share of ownership in Tether
USDT
or Circle. However, the situation becomes murkier when it comes to assets such as BNB

BNB
(Binance) or other centralized exchange tokens like OKB

OKB
(OKEx) or CRO

CRO
(Crypto.com). For a full list see here.

On the whole, these assets trade in line with the fortunes of these platforms, or their perceived momentum, but they do not convey any type of ownership or governance rights. In fact, these companies argue that their exchange tokens are not securities. Purchasing miles at an airline does not mean that you are a shareholder.

I want to touch on one other important point when it comes to market cap: the difference between free float and fully diluted. Within the world of tradable assets, the term free float means the total number of shares that are tradeable on public markets or OTC desks.This often doesn’t include closely held shares, by say founding family members, or shares locked up by its directors or executives. Fully diluted means the total number of shares that could be tradeable in a scenario when things like all employee options and convertible debt have been exercised. In traditional stock markets these can be different numbers.

Crypto uses these terms as well, but not consistently, and it is important to keep this in mind. For instance, take bitcoin. Since the original crypto asset has no issuer, no convertible debt and no options, its free float and fully diluted numbers should be the same at $444 billion. In reality that is not true. For instance, there are billions of dollars worth of bitcoin that have been lost or not moved in more than ten years. Satoshi Nakamoto is known to own 1.1 million bitcoin ($25.3 billion). Many believe that those assets will never be moved. Data aggregator CoinMetrics tracks a free-float bitcoin metric, where it claims that approximately 6 million bitcoin ($138 billion) is not freely tradeable.

Obviously this would make the existing bitcoins scarcer, and in theory more valuable.

Almost 6 Billion Bitcoin

BTC
May Never Trade Again

BTC Free Float vs Circulating Supply

CoinMetrics

Finally, sometimes the difference between a free float and fully diluted market capitalization is engineered. For instance, many projects that raise money from venture capitalists give them tokens as opposed to shares. There is no magic rule; it depends on each individual transaction. These types of deals can lead to venture capital firms, and of course the founding teams, holding very large amounts of tokens. Should these flood the market it could tank prices, so many times these large institutions agree to vesting schedules and token unlocks that takes years. When these projects start a very large percentage of tokens could be locked up (some more than 50%), but as they mature more assets become liquid and the percentage goes down. The chart below shows the fully diluted and free float market caps for the largest tokens with lockups.

As you can see below, the older projects such as Uniswap, AAVE
AAVE
, Axie Infinity and Decentraland
MANA
have lockup percentages of around 20%. However Aptos
APTOS
, a newer blockchain founder by ex-employees of Meta with a controversial monetary policy, has 85% of its tokens under restricted status. Aptos has been in the news for its price rising almost 400% in recent days, but that growth looks less impressive when this fact is taken into account.

Buying into tokens with high lockups is ok, as long as you know the risks that come along with it.

Older Projects Have Higher Free Float

Table of Crypto Projects

Nomics

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