Glows on crypto market cap

In an effort to demystify crypto for mainstream audiences, the industry appropriates terms from traditional finance. For example, lending companies such as BlockFi, Gemini, FTX and many others used words like yield or interest in marketing materials in an attempt to convince investors that depositing assets on these platforms was akin to bank savings accounts.

Granted, this may not be the most favorable example given the current state of these companies, but the assimilation of traditional financial jargon into crypto doesn’t have to be a bad thing. However, it requires you to understand these key terms and how their usage differs between the crypto and Trad-Fi worlds.

This article will focus on the term market capitalization, often abbreviated to market value.

Definition of market value

A simple definition of market capitalization is the value of all outstanding shares at the current share price. So, as an example, if Company A had 10 million shares outstanding that trade at $20 each, its market capitalization would be $200 million.

Because crypto assets are traded 24/7/365, the industry has adopted market cap as a way to track the value of various assets. For example, bitcoin’s (BTC) market capitalization at the time of writing is approximately $444 billion. We arrive at this figure by multiplying the price of bitcoin – $23,003 – by the total number of bitcoins created, approximately 19.1 million. We can repeat this function for each asset. For example ether (ETH
ETH
) has a market capitalization of $196 billion. The total market capitalization of all crypto assets is $1.06 trillion, according to calculations made by Messari.

It seems simple enough, but there are some important distinctions to be made. For example, with the exception of bitcoin and ether, many of these tokens are backed by for-profit entities whose equity ownership is privately held. These shares, which are not freely tradable, can have dramatically different values ​​than the total value of outstanding digital assets. For example, the value of all outstanding bonds (USDT) and USD coins (USDC
USDC
) are $67.1 billion and $43.77 billion, respectively. Does that mean these companies are worth that much money? Of course not because these tokens do NOT represent ownership in the companies behind these coins. Before Circle (the USD coin issuer) canceled its SPAC deal, the company itself was going public at a valuation of $9 billion.

Although there is some debate as to whether some stablecoins can be considered securities, many investors are likely to buy USDT or USDC to gain a share of ownership in Tether
USDT
or Circle. However, the situation becomes more unclear when it comes to assets such as GDP

GDP
(Binance) or other centralized exchange tokens like United Nations

United Nations
(OKEx) or CRO

CRO
(Crypto.com). For a complete list see here.

Generally, these assets trade in accordance with the fortunes of these platforms or their perceived momentum, but they do not provide any kind of ownership or management rights. In fact, these companies claim that their exchange tokens are not securities. Buying miles with an airline does not mean you are a shareholder.

I would like to touch on another important point when it comes to market capitalization: the difference between free float and fully diluted. In the world of tradable assets, the term free float means the total number of shares that can be traded on public markets or OTC desks. This often does not include closely held shares, e.g. founding family members, or shares locked up by its directors or managers. Fully diluted means the total number of shares that could be traded in a scenario when things like all employee options and convertible debt have been exercised. In traditional stock markets, these can be different numbers.

Crypto also uses these terms, but not consistently, and it’s important to keep this in mind. Take bitcoin for example. Since the original crypto asset has no issuer, no convertible debt, and no options, its free float and fully diluted numbers should be the same at $444 billion. In reality, it is not true. For example, there are billions of dollars worth of bitcoin that have been lost or not moved for more than ten years. Satoshi Nakamoto is known to own 1.1 million bitcoin ($25.3 billion). Many believe that these assets will never be moved. Data aggregator CoinMetrics tracks a free-float bitcoin metric where it claims that approximately 6 million bitcoin ($138 billion) are not freely tradable.

This would obviously make the existing bitcoins more scarce and, in theory, more valuable.

Almost 6 billion Bitcoin

BTC
Never shop again

Finally, sometimes the difference between a free float and fully diluted market value is contrived. For example, many projects that raise money from venture capitalists give them tokens as opposed to shares. There is no magic rule; it depends on each individual transaction. These types of deals can lead to venture capital firms, and of course the founding teams, holding very large amounts of tokens. If these flood the market, it can tank prices, as many times these large institutions agree on vesting plans and token unlocks that take years. When these projects start, a very large percentage of tokens can be locked (some more than 50%), but as they mature, more assets become liquid and the percentage decreases. The chart below shows the fully diluted and free float market caps for the largest tokens with lockups.

As you can see below, the older projects are Uniswap, AAVE
GHOST
Axie Infinity and Decentraland
MANA
have lockup rates of around 20%. But Aptos
QUALIFIED
, a newer blockchain founded by ex-Meta employees with a controversial monetary policy, has 85% of its tokens under restricted status. Aptos has been in the news for its price increasing almost 400% in recent days, but that growth looks less impressive when this fact is taken into account.

Buying into tokens with high lockups is ok as long as you know the risks involved.

Older projects have a higher free float