How Market Cap ACTUALLY Works
Saw a guy thousands of upvotes and awards for trying to use Market cap to explain things. The thing is he used it incorrectly.
I’m going to go ahead and explain how it actually works.
EDIT: I have went ahead and added a non-Dogecoin example of this to show this applies to all crypto – not just Dogecoin. u/RFV1985 assisted with providing non-Dogecoin example
market cap comparisons can be applied to any cryptocurrency- however he and many try to use it to discredit Dogecoin as an example – so will I and you how to correctly use it.
First – let me clear up some misconceptions that the guy used in his post
1) Economically speaking Dogecoin can rise to whatever value the market dictates based off of supply and demand. As long as demand out paces the supply then the value will rise. – this apples to all cryptocurrency
2) Mathematically speaking market cap = price multiplied by supply MC (Market Cap) = P (Current Price) x S (Current Supply) HOWEVER – This is economics- not pure straight math. The order is important – The price or supply have to change FIRST – and THEN you get the market cap.
3) YOU CANT CHANGE ADD OR DECREASE MARKET CAP TO GET A DIFFERENT PRICE – MARKET CAP IS NOT A MANIPULATABLE value you can only change the price and supply. The price and supply change the market cap – completely different.
The reason for this is because Price and supply are independent variables and market cap is a dependent variable. What this means is that supply and price can increase or decrease independently, but market cap cannot. he cannot mathematically say price = market cap / supply and then try to change market cap to change the price because market DEPENDS on the price and supply
4) *MARKET CAP DOES NOT MEAN TOTAL AMOUNT OF MONEY IN THE SYSTEM – A 6 billion dollar market cap does not mean there’s 6 billion dollars in the system. It means that the entire supply is “worth” 6 billion at the current price. people get confused so I wanted to clarify that. Simply adding money to the system does absolutely nothing to affect market cap in the same way it does not necessarily change the price/demand. The only two variables that change the market cap are price and supply nothing else can change the market cap.
5) People use the “unlimited supply/infinitely being mined” argument as a way of saying the supply will continue to increase and therefore the market cap will continue to decrease and therefore the price is unsustainable. That is completely incorrect – yes there are 5.25 billion per year – but when taken into perspective with fiat currency – this number is extremely small. Dogecoin is indeed inflationary, but in the span of human life, Dogecoin is not infinite. In order to have an infinite supply requires infinite time. It would take 360 years for the supply to reach 1 trillion dollars. Which is less than the total supply of the US dollars fiat paper supply – for comparison.
I will take this guys original point and explain it correctly. – his point is that based on market cap Dogecoin cannot hit $10 or 100. He used market cap Incorrectly when making his argument.
I also see people asking what’s stopping Dogecoin from going to bitcoin levels? Well, The short answer is the supply of Dogecoin is high relative to the supply of bitcoin. Dogecoin has a current supply of 128 billion, which is why the price is lower and harder to change in value. It is easier for bitcoin to rise $1 in price because the supply of bitcoin is so low and the supply of Dogecoin is so high. It doesn’t mean that Dogecoin can’t rise in price – just that it’s harder.
This is the long answer. First, It is important to note that demand does not necessarily equate to adding dollars to the system in 1 to 1 ratio. Demand can increase without ever having to add money into the system, however, adding new money into the system does help. I see people saying Dogecoin requires X million dollars per minute to account for the increase in supply. That is just completely wrong, and not how demand works. Increased Demand just means more people willing to trade Dogecoin at a higher price than people willing to trade at the current price. No net increase in fiat currency needs to be added in order for demand to increase.
Despite not having a capped supply, using the current supply known, as well as the mining rate to account for new coins entering – you can make comparisons to other cryptocurrency to get an idea of the demand required in order for Dogecoin to reach a certain price. The way to do this is through market cap comparisons
Market caps REAL use is a comparison tool. It’s used to compare how successful a market is compared to other markets.
If Dogecoin were to reach $1 today it would have a market cap of about 128 billion dollars ($1 x 128,495,957,919 circulating supply). Bitcoin (the most successful cryptocurrency) currently has a market cap of approximately $898,761,019,333 (~ $900 billion). This means that at $1, the total supply of Dogecoin would be “worth” about 1/7th of Bitcoins total supply.
The take away from this comparison is that in order to reach $1 Dogecoin would require approximately 1/7th the current demand of bitcoin due to the differences in supply between Dogecoin and bitcoin. This is definitely not impossible, and an achievable goal. If Dogecoin were to reach the demand bitcoin has currently – its price would $7. Since bitcoin is the highest performing cryptocurrency, $7 dollars is the most realistic possible goal at current market conditions. Anything past $7 dollars per coin means that Dogecoin is reaching uncharted territory for cryptocurrency as it will have surpassed bitcoin.
Now for the hypothetical extension of this comparison. Everything after this point is hypothetical since we don’t have a true comparison available in the market
The estimated supply of the US dollar is about $2,000,000,000 (2 trillion), thus the market cap of the US currency is $2 trillion. If Dogecoin were to reach the equivalent market cap ($2tn / $128bn), the price per Dogecoin would have to be $15.60, thus matching the entire short-term US currency (M0 money supply in economics).
This is definitely not impossible, but it is highly highly improbable to reach such value any time soon. If that were to ever happen, it would take years. Now, the entire supply of the entire worlds fiat (short-term liquidity / paper) currency is $37 trillion. You can apply the same logic from above and see that the value of Dogecoin would have to be $288.60. If it was valued any higher than that amount, Dogecoin would be "worth" more than the entire world’s short-term liquidity currencies combined. It could technically go past this point, but what that would mean is that the economy behind Dogecoin would be stronger than the entire global economy of today. At that value you wouldn’t even compare it to the dollar anymore because it already surpassed all fiat currency. It’s not impossible- but is is highly unrealistic to pass that point. It is important to note that this number is not static. Which means if the market conditions change such as an increase in supply or change in price the numbers will change.
Here is another real world example: – not mine but I wanted to add it case it gets lost in the comments
Thank you u/RFV1985 This can also be explained with a real world scenario.
As of the time I’m writing this, I am going to pick a low ranking alt…let’s use SPI (ranks #300 on CoinGecko). It has a $132M market cap.
If I go to KuCoin, I see it currently trades for $141. Based on the order book, if I were to place a $1k market buy order, the price would then immediately jump to about $144 based on the supply of the order book. So my $1k market buy order drives the price up by $3. So I effectively increased its market cap by ~$3M with just a $1k order. So clearly, market cap does not equal money in the system.
That is how you CORRECTLY use market cap
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