Crypto Market Cap Explained

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Disclaimer: Crypto is a fast-paced economy and things change quickly. Information on this post might be outdated even if written today. Do your own due diligence and stay safe. I might get affiliate commissions for purchases made through links in this post. Read the disclosure.

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Market Capitalization

Market cap is something that is often referred to in the crypto market but also in the traditional markets. Market cap refers to the total value of the coin or a token in the crypto market. Market cap is calculated by multiplying the number of coins and tokens in the market by the price of the coin or the token. For ease of understanding, I will use the word token when talking about crypto tokens or coins.

When people talk about tokens fully diluted market cap, they are referring to the value of the token when all of the supply of the token is released, “emissioned”, created, shared, minted to the circulation. Circulation means that you can buy, trade, burn, sell, transact with the token.

Fully Diluted Market Cap

A fully diluted market cap is calculated by the total supply of the token (when released to circulation) with the current price of the token. When talking about Bitcoin, we all know that the maximum number of Bitcoins that can ever exist is 21M coins (not tokens). So the fully diluted market cap would be 21M x the current price of Bitcoin.

Fully diluted market cap explained and visualized

Market Cap Comparison

Often in the crypto space, the Bitcoins value is compared against the physical world’s gold. Bitcoin is thought to be the store of value, the digital gold. What many don’t seem to recognize is that the comparison is pointless and totally useless. Currently gold has a market cap of $11T and the price of gold has been on a relatively steady rise since the 1930s or so. So if we think about the market cap of gold and how the market cap rises when the price of gold rises, then what’s the point of following that metric when it’s dynamic and moving?

The general reason why people tend to follow the market cap metric is that they want to know how the market is seeing an asset and if it’s worth investing in. It also shows what investors are valuing and if the market cap is small, then one could think that it has room to grow.

However, here lies the problem. When the market cap of gold is moving, then comparing an asset against gold is useless, because the next day the value can be of something else. Also, the other asset, like Bitcoin is also moving in valuation, meaning that people would be comparing two moving assets.

Token Comparison

It just doesn’t end with Bitcoin or start with Bitcoin. Many YouTubers and Twitters are comparing and talking about market cap and comparing one token’s market cap to another token. When in fact, it doesn’t make any sense at all. Let’s assume that a token A’s market cap is $100M and that token B’s market cap is $100M. We can think that they are valued the same. Right? Well, what would happen if token B’s supply is doubled overnight (through minting e.g.)? If the price stays the same, token B would be now worth $200M. What if no one knew, the supply has doubled? Do you know when the supply is increased or decreased for a token?

Market cap is in other words a metric that has little to no value, especially in crypto IF the token isn’t backed by anything. If we think about Apple and if they would release more shares (dilution event) to the stock market, the price would stay the same because people adore Apple products and the company. Then the market cap would increase by the number of shares they would release to the market. People would see this event in the news, but that is not the same in crypto. You might never know that more tokens have been released to the market.

That’s the reason why Olympus DAO and Wonderland type of projects are so wonderful, the tokens are always backed by something and created to the circulation by intent and code, never freely and by some person so deciding to do.

Token Facts

When thinking about tokens supply and the token contracts. Can we be certain that Coingecko or Coinmarketcap has the right data always at hand? Do we know for certain that they are tracking the contract’s information precisely and that they follow the distribution and burning to the T? What if they are missing information or have false information, then the whole market cap comparison becomes even more useless metric than it currently is.

Example of the total supply of coins, visualized

Do we know for certain that these two platforms report the tokens correctly? Do we know that they show us the correct information on the front page? For example, Wonderland token TIME has (at the time of writing) a price valuation of $3,100 and a total supply of 605,000 tokens. That would be a market cap of $1.8B. That would put the coin in the top 80 coins in Coingecko (TIME is currently on spot #140). However, they calculate the market cap from circulating supply. In traditional finance, the market cap is calculated from the outstanding shares (meaning ALL shares issued to the market). 

If the market cap in crypto would be calculated from the total supply, we would see a very different Coingecko list than we now see. This in itself can already affect the way people invest in crypto, if, for example, someone is investing in high market cap projects.

The amount of money locked into different protocols is insane, in Wonderland it’s roughly $1B and in Olympus DAO it’s $2.3B. That number already would put these two coins to different ranks in Coingecko (even though it wouldn’t matter). These things, however, might make people miss good opportunities.

TVL (Total Value Locked)

If anything, total value locked might (maybe) be something that you might want to look at. While this value is yet again is a bit debatable, it might hold some value. Total value locked is the amount of money a protocol has succeeded in locking up to itself. Total value locked means the number of money people have given to the protocol to either stake, mint, farm, or whatever. Kind of liquidity but in total value.

Total value locked (TVL) cycle visualized

The reason why TVL might be a bit useless is that this kind of scenario is possible. Person A has $10,000 worth of Bitcoin and wants to borrow money against it. Person A can go to the Aave DeFi protocol and borrow USDT by depositing assets to the protocol. Now person A has “deposited BTC” and borrowed USDT in exchange. Now with this new borrowed USDT, you can then go and buy more BTC, then deposit that BTC again, and borrow more USDT. This loop can be done as many times as you get USDT with the BTC that you just bought. The number of tokens you get will decrease with every round, but the TVL grows. TVL grows because you are depositing interest-bearing assets.

So in this sense, TVL is yet again, a bit useless metric as it can be gamified. But it can show the ballpark of where the money is moving into or out of. You can also see by TVL if the usage of the blockchain is growing and where the users are.


There are cases when tokens’ price matters and there are times when it just doesn’t matter. When we think about Bitcoin, the price matters as it indicates the health of the crypto markets (for some unknown reason). When we think about Ethereum, price matters as the gas fees are paid in ETH and if the price of ETH is high and the usage of the Ethereum network is high, then the gas fees are high. The price matters when we are investing in layer 1 protocols.

When I am investing in DeFi protocols and in layer 1 solutions, the price shouldn’t matter, as the thing that we care about the most is the growth of interoperability and TVL. DeFi protocol is growing if the TVL is growing (while remembering the small hiccups it can have) and if the TVL is growing so is transaction volume and when that grows, money is to be made in the liquidity pools and with the native layer 1 token.

When I am investing in a GameFi project, in a P2E project, the user growth matters and the utility of the token. Not so much the price. We want to see the game gathering players, players who buy assets in the game (using the native token) and at the same time buy the token to play the game. Thus the price increases by the usage.

When I am staking my tokens, I don’t look at the price so much as I am doing a long-term investment decision. Especially when the APY is super high. Even if there’s a fluctuation in the price of the token, the high APY will cover the losses in time. If the APY is on the lower side <100%, then the staked token better be one that will survive and grow in the coming years.

Written By Juha Ekman

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