Market Capitalization Impedes Price | The Unknown Vague Logic

A couple of years back when I was interacting with crypto enthusiasts on one of the forums and I made a point about one of the meme coins making it to $1, everyone said that it was impossible due to market capitalization. I did not understand what that meant, so I probed further. But no matter how much I asked or what I asked nobody could explain why market capitalization mattered.

The answers were vague – “do you think the market cap of a meme coin will be more than Bitcoin?” or “market cap will not allow the meme coin to go above a certain value”, etc. If I asked why, there was a marked silence. Nobody could explain further.

I did my own research as to why and here it is. Also, remember that if your loved meme coins can’t reach $1 today, it doesn’t mean they cannot achieve that price in a few years to a few decades from now. That again, can be attributed to market capitalization.

Let’s see how.

What Is Market Capitalization | And Why Do We Have It As A Measure?

A simple definition of market capitalization is:

Market Cap is the monetary worth of a company (share) or commodity’s (quantity) basic unit multiplied by the total number of units.

Let me throw some numbers at you and then we will come to market capitalization.

Crypto Verse

1. The total market capitalization of the crypto market as of April 2024 is $2.37 trillion
2. Out of the total market cap, Bitcoin alone accounts for $1.24 trillion
3. Bitcoin and ETH combined account for a $1.6 trillion market cap
4. There are 13,920 coins/tokens in the crypto space listed on Coingecko
5. There are roughly 20,000 coins/tokens estimated across the crypto space (it could be more. Many are listed on smaller exchanges or trading on DEXs)
6. There are an estimated 1057 exchanges worldwide listed on Coingecko. Again, the number of exchanges could be higher
7. The global crypto users are estimated to be around 580 million by crypto.com as of 2023 end

This was about the crypto space. Now let’s look at global economics.

Global Economy

1. The Global GDP at the end of 2023 was $105 trillion
2. The money supply in the global market was $83 trillion
3. Global GDP per capita was $12,263 [This figure was as of 2021]
4. Global Population as of 2023 was estimated at 8 billion
5. So, the global currency = global GDP per capita * global population = $98.1 trillion
   Note: The difference in point 2 and point 5 could be because of the 2021 numbers for GDP per capita
6. Global disposable income per capita would be roughly 70% of global GDP per capita = $8,584.1 [Assuming a flat 30% tax for all]
7. Global disposable income = global GPD per capital * global population = $68 trillion

So, that sums up all the numbers that we wanted to see. Did it make any sense so far? No? Okay, let me explain.

Market Capitalization | Why Can’t My Meme Reach $1?

Case 1: Shibu Inu at $1

Let’s take one of the famous meme coins after Doge, Shiba Inu. Here are some of the stats of Shiba Inu:

1. Number of tokens in circulation: 589 trillion
2. Current Price: $0.00002239
3. Market Cap: 13.19 billion [number of tokens * current price]

Shiba Inu reaching $1, will need a market cap of $589 trillion. That’s roughly six times the money supply available globally. Look at points 2 and 5 under the global economy. This means we don’t even have that much money worldwide to buy anything worth $589 trillion.

Besides, $589 trillion is roughly 250 times the global crypto market cap. Do we really think, that if anybody had money to buy crypto, they would pour that money into Shiba Inu and not Bitcoin?

So, this is why your favorite meme reaching $1 is not easy. It is difficult, not impossible.

Case 2: Did I Say Not Impossible? | How Is That?

The easiest answer for that is to wait for a few decades and the global economy will have the money you need to buy your favorite meme coin. Is that true?

Well, the global economy is projected to grow by a little over 3% year-on-year and if we use the same growth for money supply, then in 64 years, the global supply would be at $590 trillion. Even then, we aren’t going to put all our money into Shiba Inu, right? So, take another 60 years after that for any possibility of Shiba Inu reaching $1.

In other words, the market cap of Shiba Inu at $589 trillion [if Shib is to reach $1] is so huge that it will require 64 years from now for the global economy to even have a money supply of $589 trillion.

Case 3: So, My Meme Coin Is A Distant Dream? | Any other possibilities?

There is one other possibility that is being adopted by all your favorite meme coiners. What is that? Burning excess supply. How does that work?

There are many ways in which an excess supply can be burned. You can send your excess coins/tokens voluntarily to a burn address, or the fees that are collected while transacting in your favorite coins/tokens can be burned, or the largest holders of your favorite coins/tokens burn their holdings to reduce supply and thereby increase price.

For example, if the burning of coins/tokens reduces Shib’s supply from 589 trillion to 20 billion, then Shib at $1 amounts to a market cap of just $20 billion.

In other words, burning the token supply is a way to depress the market cap, thereby increasing the token price.

Case 4: What About Adoption? Will More People Coming Into the Crypto Verse Help My Favorite Meme Coin/Token?

That’s an interesting take. But even then, no additional people coming into the crypto verse is going to offset the fact that there is only $83-$98 trillion in money supply.

But what can happen if additional people do come in is that a mid-way can be reached. If we can combine the burning of excess tokens and bringing in newbies into the cryptoverse, a coin like Shib can reach $1 much earlier than the projected 120 years. How does that work?

From points 1 and 7 under the crypto-verse, we know that the crypto market cap stands at $2.37 trillion and users at 580 million. This roughly translates to $4000 per user leading to the market cap. Each user has put $4000 to give us a market cap of $2.37 trillion.

The global disposable income per capita is $8,584. So, for every one of those 8 billion people to spend $4000 in the crypto verse (which is 50% of their disposable income) it would lead to an inflow of:

Money Inflow: Total Population * Per Capita Spend of $4000 = 8 billion * $4000 = $32 trillion.

Now, assuming all of this $32 trillion goes towards your favorite meme [hard to digest as new inflow of money will usually go towards Bitcoin or ETH or both or any of the other 20,000 coins/tokens], and your favorite meme does manage to reduce its supply to 30 trillion or lesser over the next twenty years, there is a chance that Shib reaches $1.

A collective action of reducing supply and increasing adoption can lead to your favorite coin/token reaching $1. That is by depressing the market cap and increasing the money supply, the token price can increase.

The above point is riddled with so many assumptions. Assumptions like all of the 8 billion people across the world will join the crypto bandwagon, all of the 8 billion will spend $4000 on crypto, all of the $32 trillion coming in will go only towards your favorite coin/token, and most of all, the possibility of the crypto-verse expanding by 18 times in just 20 years.

So, it is not a straight-forward working.

Market Capitalization | Now Does It Make Sense Why Looking At It Is Important?

All of the above examples would have shown you why looking at market cap is important. Don’t be driven into believing that any coin with a humongous supply is going to make you a billionaire just because you bought a billion tokens. Chances are that the world does not have enough money to help you become a billionaire. 😉

So, keep looking at the market cap and the supply, and be prudent in your investment decisions.

Image Courtesy: Ijmaki at Pixabay

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