To understand how to valuate a cryptocurrency, there is one small first step you have to take.
Forget about everything you ever knew when you are investing in Cryptocurrencies. Economics 101 and the finance you learn at higher education mean nothing at all.
One small first for man, one giant leap for finance.
Once you erased everything you knew, you now have to closely watch valuations of cryptos reach the size of the GDP of medium sized economies.
Is Market Cap The Right Indicator?
We take market cap as a granted general valuation. We multiply the last price of the last trade made with the total coins in circulation, and this gives us the total valuation of all coins of the cryptocurrency we selected.
But, there is one considerable problem. We are always counting too much.
When we are talking about BTC, there are many coins lost since 2009. In the beginning miners were burning their hard drives and throwing them away since the cost to recover the data would be more than the Bitcoin they had mined.
Others were losing the passwords to their encrypted wallet.dat files, and lossing all access to their Bitcoin wealth.
The Bitcoin lost, is still there inside the blockcain, but are now inaccessible.
We consider these lost Bitcoins, and there has been research by many individuals about the total number of "lost" Bitcoin at 3,7 million out of a current circulating supply of 18,8 million. This is almost 20%.
Removing the lost Bitcoins from the circulating supply leaves us with around 15 million in BTC today, that can have an impact and matter.
This alone brings the total market cap of BTC down by around $200 billion today. From $ 870 billion down to $690.
See? It is a very different picture already.
Is the Price agreed by traders?
Equilibrium. This is the point where traders and sellers agree the price is set correctly. At this point all trade is nulified, there is nobody buying and nobody selling.
This is also what called "wait and see" situation. Not happening often in the crypto market but we have witnessed it before.
But, are we sure this price is agreed with both the sellers and the buyers? There is a seller for every buyer, and as price keeps dropping why are there even more sellers then?
Years ago, Bitcoin crashed to zero in MtGox, although this happened because someone hacked the admins account and managed to take control of user accounts, hijacking them one by one and selling everything at any price, setting market price level.
We watch all these order-books sitting there strongly claiming support and resistance, but traders are only interested in parts of these books. So? What are the rest orders then, sitting and waiting for price to reach extremes, are they inserted there by big pockets waiting to buy an impossible crash?
We can suppose that most orders are fake, this is money waiting to catch a lottery by buying an extreme event, yet this happens sometimes and exchanges don't have any obligation to cover their users.
Most of the order books are fake. These are orders that when the price goes close, they vanish, and this creates a domino effect with copy-trades closing too, moving the price rapidly. It can be up or down, the order books are not static.
Tether and the fake money pumping price of Bitcoin
Tether has given to opponents of cryptocurrencies all the reason to call this market a scam. It has been used for many reasons but most of all to boost the position of BTC as the leading cryptocurrency.
Ethereum has also profited a lot, although USDT (the ticker of Tether's token) is used by Ethereum DeFi and Dapps for a reason. It is the only usecase of USDT that also helped inflate the prices of ERC20 tokens that otherwise would be abandoned and forgotten.
Therefore, we understand how Tether works, and that it has so far assisted the price of BTC, ETH and ERC20 tokens. But, Tron on the other hand, has not managed anything similar, while most of USDT is in TRC20. This is abnormal and possibly has to do with the absolutely zero interest of investors in TRX outside of China, and even with the inability to attract investors inside China too.
Tether is heading to 100 billion, it can print so much in one week if it cares to do so, but it has to do it at the right time, when the market gets again on its feet.
This is how the marketcaps don't represent real trading. Without Tether it is difficult to know if BTC or ETH would be at the top two places, but I think the gap between BCH and these two would be a lot less.
In summary
To make the long story short, market cap is not representative of anything. The price of cryptocurrency is adjusted, manipulated, and speculated upon, but as with every other irregularity in a totally free market, there will be corrections and the prices will become representative of the assets.
Tether can not create tokens out of thin air for over a limit, and when it passes it, there will be a fair reaction that will create so many problems and destroy it.
The exchanges can keep giving fake volumes and fake order books, but when the price reaches to a point where investors start taking profit, then the price collapse.
We can assume that the total market cap could be divided by ten or even more to understand how much it can still grow and a 20 trillion total market cap that will still not be unreasonable, but the drop after that point will be huge.
This is a reason we are investing, but also taking profits when there is time to do so, moving all your investments and fiat in cryptocurrencies will be nerve recking once you reach the top and then crash on the bottom in a matter of months.
More information on the topic of lost Bitcoin from: USAHerald and DailyHold.
This is informative. I learned something. Thanks to you