The market cap delusion & why you should hodl
Hi guys,
this year was not good for the market cap of all crypto currencies. But let me explain why you should be patient and don't sell your assets and why market cap does not mean market cap.
If you look at the market from december - january you will see that fast rising market over 800 BN market capitalisation. When the media began to hype bitcoin, the prices went to the moon and many short-term investors threw their money on the market. At this moment, a lot of long time hodlers sold their BTC because they knew it was no healthy growth. When prices were dropping the new investors got panic and sold it again. More factors like FUD appeared and some whales cashed out too (including Mt. Gox wallets).
In my opinion the crash was good to get the health of the market back because weak investors left again. Furthermore, there were many positive changes, developments and news in Q1 and Q2, including the big progress in second layer technologies.
Keep in mind that the bitcoin price will raise dramatically when the transaction costs drop with the lightning network and other new core updates. Bitcoin is still a new technology in development, so give it time to grow up.
Next point you should look at are the institutional investors. I don't mean Warren Buffet and other investment grandpas who don't even understand what bitcoin is. I mean the big companies who already buy exchanges and who will pump big sums of money in the market. Just wait for the first legally backed ETF and even bigger sums of money.
Many people think that 100 billion dollars are needed for a 100 billion dollar higher market cap but that is not true.
If the interest and investments have a 10% increase, the total increase will be much higher.
It's the same thing about a market decrease. The market has dropped from 850 billion to now 250 billion. Investors did not lose 600 billion. Let me give you an example:
John, Peter and Roxy make their own crypto currency called "AlpakaCoin" (AP)
Peter produces 10 AP in total and sells all the AP to Roxy for 0.1$. -> Market Cap = 1$
John wants to buy 1 AP from Roxy and gives her 100$.
Roxy is happy because 1 AP has a value of 100$ -> conclusion: the market cap of AP is 1000$ (as there are 10 in total).
Roxy tries to sell the other AP for the same value and is looking for buyers
Nobody wants to buy her AP so she must lower the price
Peter buys the 9 left AP back for 0.1$ / AP. -> market cap is 1$.
As the market cap fell from 1000$ to 1$, most people would assume that 999$ market cap were destroyed, but look at the final result:
- Peter owns 9 AP and 0.1$.
- Roxy owns 100.90$
- Peter has one AP and payed 100$
Now we come to the conclusion that there were never 1000$ in the market. So be careful when drawing conclusions just from the market cap.
What are your thoughts on the market cap?
I will upvote constructive comments.
