Especially for beginners, there is a big confusion about the price and the actual value of a cryptocurrency. Most beginners would prefer to buy 1.000.000 Tokens of a worthless shitcoin than a fraction of a bitcoin.
In this article, I will try to explain different essential indicators when you try to evaluate the value of a crypto project. We will look at the price of a token and how it is calculated, the market cap and fully diluted market capitalization, what the Total value locked, Trading Volume, Total Supply, and circulating supply mean and why they are essential.
There are different aspects and values to consider when evaluating Cryptocurrency and finding out if a protocol is undervalued or overvalued.
Let's have a look at the different terms.
Market Capitalization
What is Market Capitalization, and how is it Calculated?
The Market Cap is changing every day and is calculated as follows.
Market Cap = Current Price x Circulating Supply of a Token
💡 Circulating Supply is the number of coins (estimated) that are circulating.
Let's look at an example; I will use Coingecko to get the numbers for our example calculation. Let's start with Bitcoin for this example since it's most known, and this is a blogpost for beginners.
Bitcoin Price (26. Nov 2021): $54.182,90
Circulating Supply (26. Nov 2021): 18.883.781 Bitcoin
Market Cap Bitcoin = Current Price x Circulating Supply of a Token
$1.023.178.017.544,9 = $54.182,90 x 18.883.781
How does the price of a coin calculate?
Beginners often only look at the price of a coin, which is a big mistake. At least it would be best to consider the circulating supply, the total supply, and the market cap.
The price of a coin is the Marketcap divided by the circulating supply of a Coin.
In the Bitcoin example from before, that would be.
$1.023.178.017.544,9 (Marketcap) / 18.883.781 (circulation supply) = $54.182,89 (price per Coin)
It is that simple if there were 18.000.000.000 instead of 18.000.000 Bitcoin circulating, the price would be only $54 instead of $54.000. Keep this in mind when you look at a new coin next time.
Marketcap Categorization
To assess the risk and growth potential, it helps categorize by market cap. Usually, there are Categories like:
- Large-Cap
- Mid-Cap
- Small-Cap
- Micro-Cap
- Nano-Cap
We will categorize them as follows.
LARGE-CAP
Marketcap > $10 Billions
At the moment, there are 22 Coins with a large Marketcap.
Most stable.
MID-CAP
Marketcap: $1 Billion to $10 Billions
At the moment, there are 108 Coins with a midsize Marketcap.
More volatile than Large-Caps but still stable.
SMALL-CAP
Marketcap: $100 Million to $1 Billion
At the moment, there are 389 Coins with a small Marketcap.
Usually, less history and traction in the market are also riskier.
MICRO-CAP
Microcap coin can move 30% in 5 minutes, and nobody even blinks, if BTC moves 3%
Marketcap: $10 Million to $100 Million
Very risky but can be very profitable. (100x+)
At the moment, there are 820 Coins with a Micro Marketcap.
NANO-CAP
Marketcap <$10 Million
Super risky, high growth potential, but it can make you life-changing money. (1000x+)
At the moment, there are thousands of Coins with a nano Marketcap.
Total value locked (TVL)
The TVL in cryptocurrencies is the sum of all assets that are locked up somehow. This could mean that digital assets are currently staked, people are providing liquidity or binding their coins in another smart contract in a specific protocol, which also means that they can not be sold immediately due to lockup times, and so on.
The TVL is a metric to assess the health of a protocol and the DeFI and yield market. You can find the links to the tools at the end of the articles in the Resources Section.
In theory, the higher the TVL can help quickly see if an asset tends to be over or undervalued. If the ratio is under 1, it is undervalued in many cases. In reality, the whole story is a bit more complicated. Here is an excellent article at Messario around the topic.
How is the Total value locked calculated?
The math is relatively easy.
Let's go through an example: If you buy AAVE in the work of $500 and stake it and receive rewards for it. Max is lending $1000 for a reasonable interest rate on the same platform. Christa provides liquidity for the trading commission to the liquidity for another $500 the TVL of AAVE would be $2000. Many platforms like Aave, Uniswap, PancakeSwap, Spookyswap are providing tokens with the utility that makes this possible.
There is an important ratio to look at to assess a project, the
Market Cap / TVL Ratio
It shows the ratio of the market cap and how much of the market cap is locked up in smart contracts.
Let's have a look at some examples, with numbers of 29.Nov 2021
AAVE
Market Cap: $3.156.837.340
Fully Diluted Valuation: $3.770.129.516
Total Value Locked (TVL): $15.083.062.952
Market Cap / TVL Ratio: 0.21
Fully Diluted Valuation / TVL Ratio: 0.25
💡 ratio of market capitalization over total value locked of this asset. A ratio of more than 1.0 refers to its market cap being greater than its total value locked. MC/TVL is used to approximate a protocol's market value vs. the amount in assets it has staked/locked
Uniswap ($UNI)
Market Cap: $9.300.007.842
Fully Diluted Valuation: $20.532.688.361
Total Value Locked (TVL): $10.419.886.327
Market Cap / TVL Ratio: 0.9
Fully Diluted Valuation / TVL Ratio: 1.98
Sushi ($SUSHI)
Market Cap: $1.457.615.023
Fully Diluted Valuation: $1.890.166.307
Total Value Locked (TVL): $6.620.834.311
Market Cap / TVL Ratio: 0.22
Fully Diluted Valuation / TVL Ratio: 0.29
Olympus ($OHM)
Market Cap: $4.259.277.433
Fully Diluted Valuation: $5.046.923.715
Total Value Locked (TVL): $854.335.866
Market Cap / TVL Ratio: 5.0
Fully Diluted Valuation / TVL Ratio: 5.93
Summary
I hope for the reader it got clearer how price, Market cap, and Circulation supply are playing together and why the Total Value locked is essential. If you are only looking at the price of a crypto asset does not say a lot about the coin, you have to look at different metrics to feel if a coin is under or overvalued. Of course, this is just an overview, and we are just scratching the surface here. We will dive deeper in the future.
I hope you enjoyed this piece of content, and if you have any questions or comments, leave a comment and leave your email if you want to get notified about new articles.
Enjoy and stay weird!
Disclaimer
This website includes information about cryptocurrencies and other financial instruments. All these areas are complex instruments and come with a high risk of losing money. We are NOT giving financial or investment advice; this page is for educational and informational purposes only. Please be careful and make sure that you understand how these instruments work. Also, think about whether you can afford to risk losing your money.
Weirdo.Rocks encourages you to do your own research before making any investment decision.
Resources:
https://blockchain.info/q/totalbc
https://www.blockchain.com/explorer
How to interpret Total Value Locked (TVL) in DeFi - Messari.io
Tools to check the TVL and more:
DeFiPulse - https://defipulse.com/
DeFiLama - https://defillama.com/
Coingecko DeFi - https://www.coingecko.com/en/categories/decentralized-finance-defi
EtherScan DeFi Leaderboard - https://etherscan.io/defi-leaderboard
