Due to the dominance of websites like CoinMarketCap, traditional financial metrics like “market cap” have been used to analyze crypto networks and token projects. In a new research collaboration with Nathaniel Whittemore, Nomics analyzes the various problems with using market cap and presents some compelling alternatives. [Editor's Note: The Block regularly cites market cap data from CoinMarketCap, despite its limitations.]
Four critiques the report articulates:
(1) Tokens aren't equity. Rehashing an argument previously made by Brendan Bernstein, tokens don't represent shareholder rights, future liquidation value, or any claim on cash flows. For unique crypto networks attempting to implement novel value-capture mechanisms, market cap can stand to hurt this goal.
(2) Inflation schedules. Stock supply is generally fixed, or at least predictable (e.g. secondary offerings are announced in advance, outstanding share counts are reportedly with quarterly earnings). With many crypto networks operating on different inflation schedules, it's hard to compare across networks with separate launches.
(3) The challenge of circulating supply. It's very difficult to pin down exactly what the “true” circulating supply is. Previous research from Chainalysis indicated up to ~4M BTC may be lost, with unclaimed airdrops/forked coins serving as major factors on other chains.
(4) Redemption Impact. Liquidity is a major factor in crypto networks and illiquid projects often have a materially higher market cap than other projects with deeper price discovery. At best, this is a misunderstanding and at worst, can be manipulated to make a project appear healthier than it is to unsophisticated investors.
Nomics analyzes some alternatives to market cap, including OnChainFX's “fully diluted market cap” (using 2050 for supply benchmarking), Carter and Calvez's “realized value” (which accounts for “lost” or dormant coins), and Puell and Muhamadov's Market-Value-to-Realized Value metric (price divided by realized value). (Source: Nomics)