There are numerous metrics that are used by crypto investors to interpret the tokenomics of a blockchain. These metrics can include the trading volume, circulating supply, maximum supply, market cap, and fully diluted valuation.
Let’s break them down and look into how to determine the value of a crypto asset.
Maximum Supply:
Maximum supply refers to the total amount of coins that can ever exist for a cryptocurrency. This means that once maximum supply has been reached, there won’t be new coins minted, mined, or produced in any other way.
Coins with a capped supply (limited supply) are meant to be deflationary, meaning the purchasing power of it should increase over time.
Although coins like Ethereum and EOS, there is no maximum supply, thus the number of coins will continue to grow over time. This is primarily due to it having a constant flow of new assets being added to the ecosystem. Coins with unlimited supply are seen as inflationary as the more supply released the more accessible these tokens are resulting in price depreciating, however, this is situational.
Circulating Supply:
Circulating supply refers to the number of cryptocurrency coins that are publicly available and are circulating in the market.
The circulating supply of a coin can increase and decrease over time. An example of increasing supply can be with Bitcoin, as its supply will gradually increase to its max supply of 21 million coins. This is caused by the process of mining which generates new coins every 10 minutes, on average. Meanwhile, an example of decreasing supply can be with BNB, where coin burn events take place decreasing the circulating supply and removing coins from the market.
Market Cap:
Market cap, also known as market capitalization, refers to the total amount of money invested in an asset.
For an example, if Coin A’s market cap is 1 billion dollars, it is common to think that it references the total amount of money invested in it.
Which is a misconception.
When Bitcoin reached a $250 billion market cap, it does not mean $250 billion dollars was invested in it. When a market cap increases, the price of each coin increases as well. Thus, there is no new money coming in for the coins that are sitting in your wallet.
The formula to calculate a market cap is:
Market Cap = Coin Price * Circulating Coin Supply
Which can then be rearranged to:
Coin Price = Market Cap/Circulating Coin Supply
Keeping the market cap as constant, it is expected that the price of Coin A and Coin B will be high or low.
Another example, let us assume that Coin A and Coin B have a market cap of $100 million dollars but Coin A’s circulation supply is 10 million coins while that of Coin B’s is 100 million coins.
Now applying the formula mentioned above:
Coin A’s price would be => Market Cap/Circulating Coin Supply
= ($100,000,000/10,000,000)
= $10/coin
While Coin B’s price would be => Market Cap/Circulating Coin Supply
= ($100,000,000/100,000,000)
= $1/coin
Therefore, Coin B appears to be cheaper than Coin A but one needs to understand and take account the number of coins in circulation as well.
If you ask yourself which coin is more scarce, the answer is quite simple, the coin with the most limited supply.
In addition, a coin that looks expensive may be in fact cheaper, as compared to a coin that looks cheap but is in fact expensive, all due to a difference in circulating supply,
Let’s look at an example to view this correlation:
Beneath us lies the top 10 cryptocurrencies price-wise and their respective circulating supply.
Now, below are the top 10 cryptocurrencies listed by greatest circulating supply.
Look at COMP and HOLO in the two images above. Both have almost identical market caps of $3.1 billion and $2.7 billion, respectively.
The important factor to consider is that COMP’s circulating supply is about 33328 times less than HOLO. Thus, if you were to divide the price of COMP by 33328, you will be around the per coin value of HOLO.
What is meant by this?
This would mean that if with the use of market capitalization and coin supply, we can draw insights. In this scenario, 1 COMP is worth 33328 HOLO, as the market values them similarly.
Some common misperceptions can include seeing circulating supply have a negative relationship with price. In other words, if the circulating supply of a token were to increase, it should result in the price of each token to decrease (due to basic Supply/Demand logic).
To me, it honestly depends, as the coin itself can be highly popular, and thus has established market confidence and its network effect.
Another misperception is since HOLO is worth less (price-wise), it takes less to move it, let’s say 10x-50x from $0.01636, whereas COMP won’t do the same.
Again, it depends on the overall sentiment of the market. Although, as COMP’s circulating supply is much lower than HOLO, it takes less money for price to appreciate. This is primarily caused by demand and supply acting much stronger due to its rarity in supply.
Trading Volume:
Trading Volume is the number of units traded in a market during a given time. It is a measurement of the number of individual units of an asset that has ‘changed hands’ during that period.
Each transaction involves a buyer and seller. When they reach an agreement at a specific price, the transaction is recorded by the facilitating exchange. This data is then used to calculate trading volume.
For example, if Peter sells Justin 5 SUSHI for 10 USD each, the volume of that transaction can either be 50 USD, or 5 SUSHI, depending on what the trading volume is denominated in. Trading volume can be denominated in any trading asset, such as stocks, bonds, fiat currencies, or cryptocurrencies.
In the case of traditional markets and stocks, the trading volume refers to the number of individual stocks that were traded during the measured period.
Traders, on the other hand, use volume as an indicator to gain a better understanding of the strength of a given trend. If volatility in price is accompanied by high trading volume, it may be said that the price move has more validity. Conversely, if a price move is accompanied by low trading volume, it may indicate weakness of the underlying trend.
Typically, a rising market should see increasing volume, indicating continuous buyer interest to keep pushing prices higher. Increasing volume in a downtrend may indicate increasing sell pressure.
Fully Diluted Valuation:
Fully Diluted Valuation (FDV) is defined as the market capitalization of a protocol once the maximum number of tokens have been issued by the development team. It is a method of computing the future market cap of a project.
The formula behind FDV is:
FDV = Maximum Supply of a Token * Current Market Price of the Token
The FDV metric represents the future market cap of a project once all possible tokens have been issued, provided that the price per coin has remained constant till then.
The issue with using it is that the FDV assumes that additional supply of the concerned token will not affect its price in the market and thus the market cap in the future will increase proportionally to the circulating supply at any given time.
Total Value Locked:
Total Value Locked (TVL) refers to the aggregate amount of funds locked into a DeFi protocol. An alternative view of TVL is all the liquidity in the liquidity pools of a given money marketplace.
For example, in UniSwap’s case, TVL means the amount of funds deposited by Liquidity Providers to the protocol.
TVL can be seen as a useful metric as it gives you an insight about the overall interest in DeFi. In addition, it can be effective when comparing the market share of different protocols. This can be useful for investors who are looking for undervalued DeFi projects.
In retrospect, there are many metrics that can be used to gain an edge in the market. The one’s listed and explained above are ones specific to coingecko.com. Many other participants incorporate technical analysis, on-chain analysis, etc.
Useful Links:
Website’s Useful for Coin Description, and view the info spoken about:
For Learning TA and other relevant skills, I’d recommend CryptoCred: https://www.youtube.com/channel/UCBaU9NXRPjkLGgJy-M7RPCw
For More information regarding analyzing crypto:
https://academy.binance.com/en/articles/a-guide-to-cryptocurrency-fundamental-analysis
Cheers ❤
