As relevant as the piece below already was when it was published last month, it’s even more relevant now, for obvious reasons.

And indeed, the author referred back to it in a Thursday tweet:

Total Supply Crypto Market Cap has reached $1.087 trillion according to coinmarketcap. Roughly 1/4 of the dot com bubble – but almost exclusively from private individuals… #CryptoCurrencies #bitcoin

— DK (@dke82) December 28, 2017

As published November 24 on DK’s Medium (also follow on Twitter)

A definition of market capitalization

Market capitalization is a term at home in equity markets where it is generally referred to as the equity value of a public company. Market capitalization is defined as:

the value of all outstanding shares in a company

That means it is the amount of money that one would need to pay if one were to buy all of a company’s shares (ie. own 100% of the company) at the current market price (not including a control premium). The calculation is very straight forward:

Market Cap = price of 1 share x number of shares in issue

For example, Apple currently trades at around 175 USD / share and has 5.13 billion shares outstanding (or “in issue”). Its market cap is hence close to 900bn USD.

Important differentiation between free float market cap and total market cap

In order to understand my criticism of the typical Cryptoasset market cap, it is important to understand the difference between a company’s “free float” and its “shares outstanding”.

The free float is defined as all shares not held by a major shareholder. Multiplying that number of shares with the price per share is generally considered the liquid part of a company’s market cap, also referred to as “free float market cap”. In the case of Apple, about 91% of its shares are considered “free float”, while 9% are so called “stagnant shares”. The latter includes Berkshire Hathaway’s 2.6% stake and a part of Blackrock’s holdings, as well as insider holdings (ie company employees). In less established firms or those still controlled by a large shareholder, the founder’s shares are typically not part of free float.

Hence, the free float market cap is lower than total market cap, but it is still made up of shares that could theoretically enter the market. There is no law or agreement preventing Berkshire Hathaway or Blackrock to sell their Apple shares at any point. They just have not done so for a while and are therefore not considered part of free float. It is very crucial to understand though that these shares are part of the supply. Berkshire Hathaway is an investor like anyone else (aside from its size) and when they buy a stake in a company (demand) it comes out of the total outstanding shares (supply), not just out of free float.

The issue with Cryptoasset market cap as commonly referred to

It is fair to say that the most quoted number of total Cryptoasset market cap is the one reported by coinmarketcap at this link.

Quite often, that number (currently around 260bn USD) is quoted to put the crypto market in perspective with other markets (like fiat or equity) or even to compare it with previous bubbles. The typical notion of these comparisons is that we are still at the very beginning of the rise of cryptoasset value and that any comparisons to the .com bubble at this stage are outrageous.

However, in these “total market capitalization” statistics, coinmarketcap actually only shows the “circulating supply” of all the cryptoassets, similar to the “free float” of a stock referred to above (there are other sites like onchainfx that show total supply but do not have all assets listed). In some cases this might make sense (for bitcoin, the total supply is not yet mined and won’t be for a long time so it is truly not accessible), but for almost all other cryptoassets this view is simply misleading. For ICOs for example, the standard view disregards the (often large) allocations of token made to founders or other early investors. This can be as much as 2/3 of the total supply and given lock-ups are usually non-existent or very short, all of that supply is part of the market and can and will be sold if there ever were (god forbid) an issue with the security nature of these token (if you do not believe that most token are securities, maybe check this SEC statement out.

Therefore it is important to look at the actual “Total Market Cap” of crypto from time to time to really gauge how large the market has become. You can do this by clicking on the separate coins or tokens button on coinmarketcap and selecting “Market Cap by TOTAL supply” (see below)