Many people use the value of cryptocurrency market capitalization from the CoinMarketCap website as an indicator of the direction of the crypto market as a whole. However, it is important to remember that the exact methodology for calculating this data is unknown. Moreover, sometimes the information from this resource is not trustworthy.

Other market participants use the information from the “cap” (capitalization) to enter or exit the market and make their investment decisions. And this is a more serious problem, which can subsequently result in a significant loss of capital.

These data are just ordinary numbers, and for the proper compilation of such a metric as the capitalization of the cryptocurrency market, you need real specialists.

Pic. 1. The dynamics of capitalization growth for the period 2013-2021(1).

Notice: as we see in the pic. 1, for the entire existence of cryptocurrencies, the greatest jump in capitalization was at the end of 2017 and in January 2021. According to actual information for February 2021, the level of the market capitalization of the cryptocurrency is over $1.75 trillion.

Well, let’s find out the TOP – 6 reasons why you cannot trust and rely on such an indicator as to the capitalization of cryptocurrencies:

  1. What will happen if 10% of real money leaves the market?
  2. Are the exchanges make great volumes of transactions?!
  3. Do exchanges make a fictitious price?!
  4. Many projects are dead and have almost near-zero trading volumes;
  5. What is the real supply and demand now in the active orders on the exchange (limit orders) and why will they not be removed? In other words, the question of the depth of the glass;
  6. Derivatives/Futures. If most of the market is speculators, how will this affect the market when a holder of large crypto assets sells or fixes losses (exiting the market)?

In this article, we will tell about each of the reasons and consider them. And we’ll start with the capitalization calculation methodology.

Methodology for calculating the capitalization of cryptocurrencies

Here, we will take a look at the counting methodology. We will not delve into a difficult scheme and describe the whole formula of how exactly the CoinMarketCap resource does it/ Moreover, almost nobody doesn’t knows this information.

In short words, the market capitalization is calculated as follows:

  1. We take all cryptocurrencies (projects, ICO, Defi, etc.) that are on CoinMarketCap. According to actual information, there are 4128 of them.
  2. Each project has a special LAST PRICE. This is the last price of the executed order (deal) on the exchange.
  3. Each project has a coinage policy. It is the same as in the central bank, but only in code. For example, the emission of bitcoin is set up to 21 million coins – one block per 10 minutes.
  4. Now we multiply 18.6 million coins (in circulation) * the last price from point 2. If you do not know the number of coins in circulation, multiply by the total amount (21 million).
  5. We get the capitalization of the current project, Bitcoin.
  6. Summarize the capitalization of each project, repeat paragraphs 1-5. After doing this 4128 times, we get the number – the capitalization of the cryptocurrency market.

Reason # 1: If 10% of real money leaves the market, this can reduce capitalization many times

One of the most significant events in the world of cryptocurrency lately was the purchase the Bitcoin by Tesla for $1.5 billion. This led to the growth of the main cryptocurrency by 13% in an of hours and breaking the all-time high of $44,000. This once again confirms the relationship between crypto and real money. If you try to find the amount of real money for which the cryptocurrency was purchased, then nothing will come of it, there is no such information on the Internet. Of course, the capitalization of cryptocurrencies is exaggerated and if at least 10% of real money is withdrawn from circulation, then a fast and significant collapse cannot be avoided. This is also called by traders a panic sell.

This reason does not affect the methodology for calculating capitalization, but it makes it clear that these are just dry numbers. Deciding on such data in this market more looks like suicide than a proper strategy.

Reason # 2: Exchanges are spinning volumes

A study by the Blockchain Transparency Institute (BTI) showed that only 2/25 of the major crypto exchanges do not overstate the trading volume. BTI also knew strategies for working bots, which helps to increase the trading volumes of the crypto market.

From the report of the Blockchain Transparency Institute, it became known that only the Binance and Bitfinex exchanges indicated truthful information about the real volume of cryptocurrency turnover on their sites. The Huobi and HitBTC exchanges indicated volumes that were only a quarter in line with the actual. Trading volume on other exchanges reached only 1%.

Yes, this reason does not directly affect capitalization. But this is an important factor to understand that not such a large amount is needed to arrange a panic sell in the market.

Reason # 3: Exchanges make a fictitious price

And this reason directly affects capitalization!

Do you remember, we multiplied the LAST PRICE by the number of coins in circulation? So, market participants are well aware of the fact that Bitcoin is very volatile. And this plays into the hands of some unscrupulous traders, using bots and automated programs for price speculation, and they do it successfully. In addition to this, they also use a little-known exchange platform. So, now we get an atomic mixture of incorrect and false data.

There are some popular strategies, by which the market swings, but such manipulations are prohibited in traditional markets, and the SEC is struggling with the mechanism of their use. But there is still the wild west on the cryptocurrency market. And such things, that hat was in the United States at the time of the birth of the stock market is happening now in cryptocurrencies.

Using our experience, competence, FOBS scientific approach, you can avoid these problems, but also systematically make a profit.

By the way, one of the most popular methods is Ping-Pong, so traders buy and sell crypto from themselves. Due to this, they have an impact on market price, but this process is easier to track. The second method is pumping and dumping. For example, this method was recently used by many active market participants, through a closed channel in Telegram. They pumped Ripple, and it almost doubled, and then there was a dump, and it returned almost to its past price.

Reason # 4 Many projects are dead and have about zero trading volumes

According to recent data, about 1559 coins are considered “dead” according to information available on the official website of the statistics “deadcoin”. These projects are considered “dead” because they are traded on exchanges for less than 1 cent (or not being traded at all). There are also coins like Dotcoin, which belonged to the New Zealand exchange Cryptopia. Due to the disappearance of the founder of the exchange – the keys to cryptocurrency wallets also disappeared, as a result, the company announced its liquidation and the Dotcoin token disappeared too.

It is also easy to inflate an already unreasonable capitalization from “dead” tokens like MarsCoin. For example, after the mention of its guru Elon Musk, the value of the coin increased by 3600% in a few hours.

Well, you have already known enough information about the manipulation of capitalization crypto. We think these 4 reasons are enough for you to make the right decision – you need to invest in this market with caution. But, let’s still consider another reason, a more technical one …

Reason # 5 Glass depth

The Depth of Market is a table with digital indicators that display the price to buy or sell a cryptocurrency asset. These indicators are very important in market trading, they clearly show the current rate and direction of the trading. As a rule, indicators are highlighted in red (asks), in other words, these are sell orders, and green ones are buy orders (bids). And all together they call it a market supply. Or just a glass.

To understand how exaggerated the real capitalization of the cryptocurrency is, you need to compare the depth of the order book in dynamics (in other words, the liquidity at the moment and for a certain period in the past).

There are several reasons why such glass depth will not provide a complete picture of liquidity. Because at any time a limit order can be removed or added to the general order book. And the problem is that there are no deals in the order book. It is only a wishes to buy or sell at a specified price. And they are so changeable … If you want to have up-to-date information about liquidity – you also need to use the tape (history) of transactions.

But there is also another side – a large number of fictitious transactions and exchanges twist volumes. Besides, there are also market-making algorithms that cause turmoil, mislead the minds of newcomers and clean out their wallets. Millions of dollars are lost on such manipulations, and someone else fills his pocket, taking advantage of the low awareness of the crypto market participants.

You will not find such information in the public domain, (about the depth of the order book + lists of all transactions), and only experienced specialists can discern truth from fiction and get the maximum benefit from the order book and increase the assets of their investors. This will give the maximum effect with the complex use of tools.

FOBS Asset Management company has useful knowledge and rich experience in digital asset management and can identify the depth of the order book, fictitious transactions, assess the real direction of movement, and the interest of other players at a specific time. But even this will not give you a 100% guarantee of a successful transaction. And is there at least one thing in our life with a 100% guarantee? Except for death and taxes 🙂

Reason # 6 Derivatives/Futures and Speculators

A derivative is a financial document that is an asset between two participants in trading on an exchange.

The most common derivatives are forwards, futures and options.

Futures – is an exchange-traded contract for the purchase/sale of the underlying asset in the future, but at the price agreed now.

Derivatives are often used by traders to speculate for excess profits and to hedge risks.

95% of the volume on the crypto market is in derivatives/futures. If an amount equal to even 0.1% of the daily volume comes to the market, this will significantly affect the total capitalization. And according to our subjective standards, it can be 10%.

To understand the whole situation, take a look at the derivatives trading volume in the last 24 hours shown in the pic. 2.

pic. 2. Trading volumes of derivatives per day for the top 5 exchanges as of 20.02.2021.

As you can see, in the pic. 2, Binance has a significant trading volume, over $47 billion, Huobi Global – almost $21.7 billion. So, if we relying on the statistics of trading on the top 5 exchanges, the volumes are almost $100 billion. This is an incredible amount of trading on financial obligations for the crypto market.

Conclusion

The competent approach of FOBS Asset Management will help you make the right decisions. Because we base not on miscalculations built on dry numbers, but on a proven strategy and a clear plan. It is easy not only to protect your capital but also to increase it with a help of a company with highly qualified specialists.

It is very difficult to predict the development of the cryptocurrency market (moreover, to make it by using an incorrect metric), and only an incompetent specialist will rely on its accounting and development dynamics.

An ordinary person cannot take into account all this data in real-time (dead projects, unknown and highly risky exchanges, and many other factors), but FOBS Asset Management can easily cope with this task. The company will draw up its metric and will be based on it in making many decisions. And the company’s financial statements tell about the efficiency of FOBS Asset Management – investors who trust it with their millions of assets.