Is the market cap the best metric for evaluating cryptocurrencies?
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Is the market cap the best metric for evaluating cryptocurrencies?

By Michele Porta - 28 Sep 2019

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The market cap, or market capitalization, is the main method of classifying cryptocurrencies since altcoins first appeared in 2011.

This modality has been mainly spread by CoinMarketCap, which has quickly become the leading provider of data on the crypto market.

Market cap: Is the ranking correct?

Today there is a wide variety of sites and apps for crypto market analysis. Most of them, however, only use market capitalization as the main classification factor.

However, many experts agree that this is not the best way to draw up a correct classification of cryptocurrencies. This is because such a metric can often be misleading.

Market capitalisation is often associated with the value of a cryptocurrency.  The value, for example of bitcoin, is calculated from the number of bitcoins in circulation multiplied by the price of the same token.

This metric owes its origins to the stock market, where it is used as a measure to evaluate the value of companies listed on the stock exchange. However, in the cryptocurrency market, the market cap as a value measure could have its own limits.

As pointed out by researcher Mustafa Al-Bassam of University College London, market capitalisation can be easily manipulated.

Mustafa pointed out that price and market capitalization can be easily manipulated by off-market trading. In addition, taking it alone would result in poor metrics for valuing cryptocurrencies.

Which ranking parameter to use?

According to some experts, market capitalization calculations should be made using only the supply of circulating tokens and not the total supply of tokens.

This is particularly evident for those tokens that are still mostly held by the founding team. In addition, it is necessary to consider the role of inflation which is partly responsible for the future value of the tokens.

Cryptocurrencies with low inflation rates retain or increase their value over time while those with high inflation rates should see their value decrease over time.

In the world of cryptocurrency, there is the advantage of knowing in advance the rates of inflation as they are written in the protocol itself. This allows to estimate the inflation over time and consequently the future capitalization.

However, sites and exchanges do not show investors this information in a simple way and therefore very often they do not take it into account in their evaluations.

To combat this problem and better assess future cryptocurrency values, some experts argue that sites and exchanges should add an inflation factor calculated as follows:

Inflation factor = (token emission in the next 5 years) / (current total offer) * 100%.

This metric shows the percentage increase in the supply of circulating tokens of a cryptocurrency.

Other metrics to consider

There are also other metrics, in addition to the market cap, that could be taken into account and that can offer a more in-depth view of the performance of cryptocurrencies.

According to some users who have been asked about the level of decentralization, the growth rate of participants/active nodes and the activity of developers are the fundamentals that must be considered.

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