Determining the real market capitalization of crypto assets

From its early beginnings less than a decade ago, the cryptocurrency market has evolved into one of the world’s biggest financial innovations and is now a $2 trillion market. Yet how much the crypto landscape really is worth is a much-debated topic, with crypto experts Paul Lalovich and Novak Draskovic from Agile Dynamics outlining the need for a more mature approach for market cap assessment.

Five years ago, if you wanted to inquire into the state of the cryptocurrencies market, the first question you would ask would most probably be about the price of Bitcoin. Although having already lost much of its synonymity with crypto and blockchain technology in general, Bitcoin was still regarded as the key industry anchor and the most reliable indicator of what was to come.

Fast forward to today and things have changed quite a bit. While still by far the most prominent cryptocurrency in terms of both the single unit price and total market capitalization, Bitcoin on its own represents well below 50% of the entire crypto assets value.

In 2022, when inquiring about the state of the cryptocurrency market, the first question to ask would be on the total market capitalization of the whole landscape. And the answer is quite astounding – at the time of writing the total market cap of crypto is estimated at around $2 trillion, more than double the level of one year ago, but down significantly on its November 2021 highs of about $3 trillion.

This puts the combined value of all cryptocurrencies shoulder to shoulder with the world's biggest publicly traded corporate giants such as Microsoft, Apple, Amazon, etc. Yet at the same time, the high valuation raises several questions on the market’s value, most notable on how this value is determined.

Calculating the stock market’s capitalization is typically done by multiplying the last price of the stock trading by the total number of stocks in public circulation. In the case of ‘traditional shares’, the value of shares is backed by economic fundamentals such as total assets (liquid assets, tangible assets and intangibles) and predicted future cash flows.

As a result, traditional stock prices and total capitalization value are pretty reflective of the overall state of a company. With crypto, this relationship is more ambiguous. Cryptocurrencies have no liquid assets, no tangible assets, and very limited intangible ones that can back and justify their current price and market capitalization.

In the end, it all comes down to the brand value, i.e. the collective belief of buyers in the current pricing of the token that they are investing in, along with its long-term potential. This makes the cryptocurrency market notoriously volatile, offering unparalleled possibilities of gains, along with the highest degrees of risk associated with them.

It also opens the question of the actual present and long-term value of the entire space, a question most easily approached by explaining the structure and ways the total market capitalization of all the world’s cryptocurrencies can be calculated.

The present $2 trillion mark, or the last year’s high of $3 trillion, is achieved by simply multiplying the last price of every cryptocurrency trading with its total public supply. This approach has many downsides. First of all, not all coins and tokens were traded at the last recorded price, which concerns only a very small portion of the total asset volume.

For example, a single token can be traded at 10 times the price of the previously traded one, raising the total market cap of that cryptocurrency tenfold, even for just a few seconds. Such disregard of the trading volume, an important indicator of an asset’s “real’ or rather more long-term value is simply absurd.

Realized market capitalization

To counter deviations like this, the notion of the realized market capitalization could be considered. This approach to calculating a cryptocurrency's market cap is determined by multiplying every single coin or token by the last price they were traded at. If a single coin is dormant for weeks, months, or years, only the last transaction will be examined, even if at a much lower price than the current market one.

This method gives us a more objective approach, disregarding the short-term speculations and volatility to the highest degree possible, setting up a clearer and more long-term perspective on the matter. However, this approach faces a few bottlenecks such as complex technological issues, the lack of transparency associated with many blockchains, and the manipulation of the total versus circulating supply ratios.

In terms of Bitcoin, a currency that has the most well-known and transparent ledger, the realized market capitalization approach roughly puts the total market cap at about 1/3 of the traditional approach (using the Bitcoin’s current price). For an average cryptocurrency, the gap between the two calculating methods tends to be larger, lowering the total market cap of the space even further.

Factoring in ‘real’ money

While the realized market cap presents us with a more balanced and long-term approach to crypto space valuation, it still does not account for the lack of real-world value supporting the blockchain assets. And the only tangible value that can presently be associated with them is the amount of fiat money that is invested into cryptocurrencies at any given point in time.

This value is surprisingly easy to calculate. While cryptocurrencies can be and to a certain degree are traded against each other, they are usually bought with and sold for stablecoins – cryptos whose value is pegged to a specific fiat currency, most notably the US dollar. Stablecoins can only be minted through an equal amount of fiat. Therefore, their total supply gives us quite an exact estimate of how much real-world money is invested into the blockchain technology space.

The total stablecoin market cap is around $170 billion, accounting for less than 10% of the total cryptocurrency valuation. If we take this ratio as a historical median, we could argue that the real tangible value of all the world's cryptocurrencies is 1/10th of its traded price.

The road ahead

What does this tell us about the blockchain space in general, its upsides and downsides, its current state at this point in history, and the long-term prospects associated with it?

First of all, the volatility of crypto prices is here to stay, at least for the foreseeable future. The market, in general, is quite a long way from being mature, with years and perhaps even decades taking it to reach the levels of stability of the traditional stock markets. The risk/reward ratio associated with this is an immensely long and deep topic of its own.

If one dollar of investment can raise the current value of a crypto asset up to 10 times, it means that the historical highs of Bitcoin and other coins and tokens price are still far from being reached, though they may prove to be very short lived once achieved. If history is anything to go by, we could use the Dotcom bubble as a good goalpost, with $13 trillion market cap being a good long term goal for the entire crypto space.

Speaking outside of the terms of short-lived spikes and high volatility, blockchain based technologies will have to find their true long-term value through widespread development, adoption, and commercialization of products and services used by other industries and people in their everyday lives.

If they manage to do so, the price fluctuation of an average cryptocurrency will come to resemble that of the traditional stocks, and their total value might gain an even greater percentage of the global market than the present shot-lived highs could ever have suggested.