Token Analytics #3

The Underlying Structure of Digital Assets

Feb 17, 2021

The subject of the last Crypto Crier was that our current financial system is profiteering off the American people through the use of questionable fee structures and unfair distribution of savings rates. If you missed this and would like to read further about DeFi and how to make your money work for you, follow this link here.

Token Analytics

There are many differences between traditional investment vehicles and digital assets, but I see most beginners fail to grasp the understanding of supply and market capitalization. The only changes that an investor has to worry about in traditional finances are adjustments to monetary policy done by the governing body of that asset or commodity. With the development of Blockchain systems, governments are not the only entities that can affect economies. This allows for each token to have an individual economy, and because of this, we have to treat each token completely differently. To explain these ideas at their most basic level, I will use Bitcoin (BTC), currently priced at 48,414 USD (2/15/2020), and Ripple (XRP), priced at .57 USD (2/15/2020) as my examples throughout this article. First, let’s clarify the definition of supply and market capitalization (market cap) for digital assets

Supply

The supply of a digital asset refers to the total number of coins or tokens in circulation. This is the most basic definition. There are many subsets of supply that you must also understand.

Maximum supply refers to the total number of coins or tokens that a specific blockchain will ever produce. This number is usually created at the inception of a blockchain system and cannot be edited unless stated in the system's source code. The maximum supply of BTC is 21 million, and the maximum supply of XRP is 100 billion tokens. That means XRP will have 4,761x more tokens in existence than bitcoin. The purpose of this explanation is simple; I have heard many neophyte crypto investors say, “these are cheap, and maybe someday these will equal bitcoin (48,414 USD).” For this to be true, each XRP would only equal 9.18 USD, which shows that 100 dollars XRP would be extremely hard to achieve.

Another term that is a subset to supply is total supply. While similar to maximum supply, total supply is the current supply, including burned or lost tokens. Over the years, as BTC developed, early Bitcoin holders were careless with their access keys, and an estimated 3.7 million BTC 1 is believed to be unrecoverable. When taking this into account, the scarcity of BTC is actually increased and could increase its’ value further in the future.

Supply may seem like an easy enough concept to understand, but many blockchain projects use supply to affect their token price to confuse potential investors.

Market Capitalization

Market capitalization (market cap) is one of the best metrics for digital assets. The market cap of a coin is calculated using this formula: Market cap = Total Supply * Price of each coin. So for our examples, The current cap for BTC is roughly 928 billion (928,290,155,526 USD) and the cap for XRP is 23 billion (23,833,367,218 USD). The purpose of this calculation is to show how a token’s price is relatively meaningless without considering its supply.

Another metric I use frequently is Fully Diluted Market Capitalization. This calculation takes into account the maximum supply instead of the total supply. It gives you a better picture of the market cap when all tokens (including tokens not yet mined) are distributed. Again, it is important to consider this as many blockchain companies hold large percentages of tokens to give the appearance of scarcity. This metric has little effect on well-distributed tokens such as BTC, which computes its’ price to 44,204 instead of 48,414, which is only an 8.6% difference. While using XRP’s fully diluted market cap, the price calculates to .23 USD down from .57 USD, a 54.1% difference. These differences are staggering and are one of the reasons you should be researching all tokens you are looking to invest in.

That’s a Wrap

Digital assets are a different animal when compared to traditional finance. As a green investor, fully understanding the basics of supply and market capitalization allows you to rein in expectations and portray realistic price goals for your potential investments. One of the best places for crypto research and analytics is on the website Messari that I constantly use when researching a potential new investment. What are some useful crypto analytics that you use?

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That’s all for the weekly Crypto Crier. If you enjoyed this article please like and share. If you have any questions, please leave a comment and I can answer your questions further. As with all of my writing, this is not financial advice and is my opinion. I cannot stress enough how important it is to do your own research on all financial endeavors. I hope that these newsletters can help investors realize the current financial systems’ downfalls and usher in a more equitable system without middlemen.

Let’s build something together.

Crypto Crier