Bitcoin Market Cap: 5 reasons to not get too excited
Bitcoin's share of the total cryptocurrency market capitalization crossed the 70% threshold in early September 2019. The surge led at least two financial analysts to declare that alt coins are not coming back. By that, we take it to mean they do not see a future investing in alt coins. They see Bitcoin's market dominance as insurmountable at this point.
If you are a casual Bitcoin user who only buys and sells here and there, none of this matters to you anyway. But if you are a serious cryptocurrency investor, do yourself a favor and don't get too excited. Market capitalization might be a tool for measuring the viability of an investment asset, but it is not the be-all and end-all of a particular asset's worth as an investment.
Below are five reasons to take market capitalization with a grain of salt. By the time you get to the end of this post, you should have a better understanding as to why alt coins are not going away as valuable investments.
1. Not indicative of performance
The best way to start this discussion is by stating the reality that market capitalization is not indicative of performance. Market capitalization, defined in the simplest possible terms, is a measure of the total aggregate value of a company or organization. What is aggregate value? It is the combined value of the total investment in an organization and the trading price of its asset.
It is absolutely true that Bitcoin's market capitalization is impressive. There is also no denying that the second and third placed cryptocurrencies do not even come close in market capitalization. But what must be understood is that price affects market cap substantially.
The fact that Bitcoin was trading at just over $10,000 when this post was written is due more to the value of a single coin than the amount of money invested in the platform. To illustrate the point, let us say BTC was closed to traders for the next 24 hours. Let's also say that this made investors nervous enough to start dumping their coins as soon as the market opened back up.
If Bitcoin fell to $5,000 in the first hour of trading, its market capitalization would be slashed. And yet it would still be more valuable than most other cryptocurrencies on the market. Bitcoin's performance would tank but its market capitalization would still be higher than nearly every other coin. This clearly demonstrates that market cap is not indicative of performance.
2. Market cap is misleading
The fact that market cap is not indicative of performance leads to the very next point: it is also misleading. Far too many investors look only at market cap and volume to determine whether or not to put money into an asset. This strategy does not work for securities; it doesn't work for cryptocurrencies either.
Market cap tells you nothing but the aggregate value of the organization behind a particular asset. Bitcoin's market cap is only a measure of the platform's aggregate value. It tells you nothing else about the value of Bitcoin's tokens, future plans, its use as a monetary system, etc.
If you are not clear as to why this matters, consider retail giant Amazon. This is another company with a tremendous market capitalization and decent daily volume. If you were to just look at those two factors, how much would you know about Amazon? Very little.
Part of what makes Amazon so strong is that nearly the entire world is familiar with what it does. Moreover, almost all of us shop on Amazon - at least occasionally. We have confidence in the company not because of its market cap or volume. We have confidence because we actually know and do business with the company.
3. It doesn't automatically exclude others
Reason number three is as simple as understanding that large organizations with impressive market caps do not automatically exclude others. As domineering as Amazon is in the retail sector, their performance has by no means excluded others from participating in the sector. There are plenty of other companies doing business in retail, and many of them represent solid investments.
No one will argue with the fact that Bitcoin dominates cryptocurrency. But like Amazon, its strength does not exclude others from the market. There are thousands of cryptocurrencies you can buy other than Bitcoin. A fair number of them are not even intended to compete with Bitcoin as a monetary system. They exist for some other reason - like creating a blockchain ecosystem, for example.
You would have no trouble finding other projects to invest in. A lot of them offer quite a bit of potential for the mere fact that they are not monetary systems. Sure, they may not ever compete with Bitcoin in terms of market capitalization or volume, but that does not mean they are not capable of generating an incredibly good return on investment.
4. Investors are fickle
Anyone who purchased Bitcoin on its run up to $20,000 knows full well how fickle investors are. Just remember that Bitcoin was trading at around $3,000 at the start of 2019. Between Bitcoin's peak in 2017 and the start of 2019, a single BTC lost $17,000 in value. Today the price is back up in excess of $10,000.
The point here is that Bitcoin prices fluctuate like the weather. The price is up one day and down the next. There are times when Bitcoin's price remains relatively stable for a significant amount of time before rising or falling again. It is just not predictable.
What does this have to do with market cap? A lot. Let us go back to what market cap actually measures. It is an aggregate value consisting of a combination of real investments and the value of asset units. As such, Bitcoin's market cap rises and falls based on the price of a single coin.
If investors suddenly get nervous and start selling BTC they will cause a drop in market cap. Once they feel it has bottomed out and start buying again, market cap rebounds. What must be understood is that market cap in both cases has nothing to do with the inherent value of Bitcoin as a project. It is only changing because investors are buying and selling.
5. Market cap is reactionary
We can sum up the other four points in this fifth and final point: market capitalization is reactionary. What do we mean by this? We mean that it is a measurement of other forces rather than anything it accomplishes on its own. There is nothing inherent in Bitcoin, as an organization, that contributes to market cap. Market cap only exists because people have invested in Bitcoin. It is a measurement that reacts to what those investors do.
Those industry analysts who believe alt coins are not coming back seem to view market cap as a proactive force. They see it as something that actively influences investments in other assets. But it doesn't. All market cap can do is react to market forces. It can only go up or down as coins are bought and sold.
By definition, no reactionary force is capable of acting under its own power. A reactionary force is always the result of at least one actionable force. In the case of cryptocurrency, those actionable forces have a lot more influence on coin prices and investment worth than market cap.
Market capitalization is one of the ways we measure the value of certain assets. It is a good measurement in terms of understanding the aggregate value of an organization and the assets at its disposal. And to a certain extent, it gives you a good idea of the strength of that organization. But that is as far as it goes.
Bitcoin's market capitalization dominance only tells us that a lot of people have put a lot of money into it and gained a significant return as a result. But it by no means suggests that alt coins are dead as investment opportunities. No, there are other factors to look at if you are trying to decide whether or not a digital asset is worth investing in.
For example, look at the purpose of the asset. Is it a cryptocurrency designed solely to be a monetary system? Is it a token intended to raise money to fund a blockchain project? The purpose of the asset tells you a lot about the organization behind it.
You can also look at price volatility. This is not so much an issue with stocks and bonds, but it is particularly important to cryptocurrency. Price volatility plays into your aversion to risk more than any other characteristic. The more risk-averse you are, the less volatility you want.
We could offer you even more things to look at, but we assume you get the point. The thing to remember is that market cap only gives you a limited amount of information. It is not the be-all and end-all in determining whether or not you should invest in a digital asset. Do not worry about what everyone else is saying regarding Bitcoin's market cap. Be smart; do your own research; make your own investment decisions.