Read my previous post: Towards a More Nuanced Understanding of Meta Market Cap [Part 1 of 2]
We fully expect the market cap of all fiat currencies to continue to increase steadily over time with a significant uptick recently due to COVID relief stimulus money printing. However, this ~$120 Trillion USD value of all the world's fiat currencies is a relatively static figure when compared to the market capitalization of all stocks and all cryptocurrencies. I used to think of the ~$120 Trillion USD fiat market cap as a figure which we could use to establish a ceiling for the market capitalization of the stock market and cryptocurrency market. However, I'm beginning to see that the fiat market cap doesn't directly limit the cryptocurrency and stock market caps in the way that I had originally imagined.
Now I'm more concerned with the effect of the need for the fiat market cap to grow to provide sufficient fiat liquidity to service the ever-growing stock and cryptocurrency markets. So the fiat market cap relative to the stock and cryptocurrency market caps becomes more of an indication of the true fiat liquidity for stocks and cryptocurrencies. It seems that the world's fiat money supply has been managed to retain some sort of balance with the market capitalization of the global stock market. We have ~$120 Trillion total fiat value and ~$90 Trillion total stock value. If the ~$2 Trillion cryptocurrency market cap suddenly surpasses the stock market cap of ~$90 Trillion, there may be a real strain on the ability for central banks to provide enough fiat liquidity to these markets.
Fiat Market Cap Does Not Define Hard Cap on Crypto or Stock Market Caps
When I wrote, Key Observations of Meta Market Cap, it seemed as though fiat market cap could serve as a frame of reference for understanding how much money is in existence to conceivably flow into stocks or cryptocurrencies. And yes, to an extent, that is true. Although, I knew it was more complex at the time, I decided to optimize for simplicity while I got a handle on things. Now that I am circling back to dive deeper into market cap, I realize that I have overlooked the simple fact that there is not a 1:1 correspondence between 1 fiat dollar invested and 1 fiat dollar worth of stock or cryptocurrency market capitalization. That's how I was treating the relationship between the fiat market cap and the crypto and stock market caps.
As the price of a cryptocurrency or stock fluctuates, so does the market cap and value of each $1 invested. So it's not as though the ~$120 Trillion fiat market cap sets a hard cap or ceiling on the crypto market cap or stock market cap. It is true that the fiat market cap DOES define a hard boundary of the number of dollars which may be used to purchase stocks and cryptocurrencies. However, even this limited quantity of fiat dollars does not restrict the potential for crypto or stock prices to increase and their market caps with them.
The real question is what would the asymptotes look like? As the market capitalization of stocks and cryptocurrencies begin to break away considerably from the fiat market cap, there will be proportionally less and less fiat dollars with which to purchase an increasingly expensive and limited inventory of stocks and cryptocurrencies. So the question is, does the market self-limit the upward price potential of stocks and cryptocurrencies as their prices and market caps begin to necessitate the printing of additional fiat currency in order to sustain fiat liquidity for the ever growing market cap of crypto and stocks? Or, do the speculative stock and crypto prices climb even higher as more fiat currency is printed to support the immense conversion of stock and crypto wealth into USD?
Now it seems clear that fiat market cap can not contain the price of a stock or crypto, so by extension it can not contain its market cap either. Exploring this relationship reminds us that the market cap of a stock or cryptocurrency can not define any sort of ceiling at all on its own. The only price ceiling a cryptocurrency's market cap may define is relative to the market cap of other cryptocurrencies. Many people don't seem to understand the basic factors which set the price of a given stock or cryptocurrency, so if we can understand price in the context of market cap and meta market cap, we may gain a significant advantage when forecasting future market conditions.
I have often thought of fiat market capitalization as the metric which sets the boundaries of the field of play. However, I am only just now realizing that the field has the potential to grow a whole lot bigger than the existing fiat market cap's lines. There is nothing stopping the price of every cryptocurrency from doubling in the next 30 days. The crypto market cap would go from $2 Trillion to $4 Trillion, but it wouldn't require $2 Trillion additional dollars be used to purchase cryptocurrencies. That sort of price movement happens all the time without crazy high trading volumes. By this same logic, I don't see anything preventing the cryptocurrency market cap from rivaling the stock market cap in the very near future. It's no longer a question of the number of dollars which would be required to grow the market cap to that level, it's simply a question of price discovery.
Some Nuances of Market Capitalization
Now let's discuss the often overlooked nuances of market capitalization. We can think of the market capitalization as the total amount of dollars invested in an asset or asset class. However, that's not entirely accurate. Actually, it's flat out wrong and we have to be very careful not to misunderstand what market capitalization is. Market capitalization is NOT to be confused with, "the total amount of dollars which have been invested in an asset or asset class". That would actually be a really cool metric to have though. I guess we would call that something like the "Market Cap Cost Basis". I imagine that data would be extraordinarily useful to have... and I'd like to explore this concept further in the future. But that's not what market capitalization is.
Market capitalization is NOT to be confused with, "the total amount of dollars which have been invested in an asset or asset class"
Market capitalization is more correctly described as, "the cumulative dollar value of a particular asset or asset class." The difference is subtle, however, I'm learning that understanding this nuance is critical for understanding the behavior of markets as well as the limitations of our market projections.
Consider our hypothetical $B2TF with a market capitalization of $100 Mil. It doesn't require the market to spend $100 Mil on $B2TF in order for it to gain a market capitalization of $100 Mil. In practical terms, it also does NOT mean that the entire supply of 1,000,000 $B2TF could actually be liquidated for $100 Mil. That would require the full and complete liquidation of every $B2TF coin at the present price. Of course, that could never happen because a sell-off would cause a rapid price drop, so the market capitalization is never actually fully liquid and convertible at any given time. Therefore, market capitalization does NOT reflect the true value of the immediate liquidation of the full supply.
It's also critical to consider the token or stock supply and distribution strategy when evaluating market capitalization based on the circulating supply as opposed to using a fully saturated supply for your market capitalization analysis. Let's explore these concepts in greater detail in the context of price.
Market capitalization is more correctly described as, "the cumulative dollar value of a particular asset or asset class."
Price Discovery is Market Capitalization Unchained
Price discovery is a fun topic to explore because it brings us back to the simplest understanding of markets, "the value of anything is what someone is willing to pay for it." Some of these concepts are so exceedingly simple that they almost have a mystical zen-like quality to them. You could ponder these definitions and relationships for decades and still have only a circular understanding of their meaning and application. So please don't over-analyze these topics, but don't ignore them either. That was the critical component that I overlooked in, Key Observations of Meta Market Cap.
The value of anything is what someone is willing to pay for it.
I failed to adequately consider that growing a market cap from $100 Mil to $1 Bil (as in our hypothetical example of $B2TF and $SBC), does NOT require an additional $900 Mil dollars to be invested in $B2TF. The only thing that has to happen in order to grow the market cap of $B2TF from $100 Mil to $1 Bil is for 2 people in the market to agree on a price for $B2TF which is 10x higher than the present price of $100. Actually it really only requires the 1 person to decide to buy $B2TF for a price of $1,000. Of course, this is a huge oversimplification because it actually requires the whole market to agree on this price in order to sustain the price. However, the critical point remains that market cap is a slave to price and supply.
You may understand now, why I have been having a sort of existential crisis over the past few days. It's painful. I feel like everything I thought I knew is less true AND more relevant... all at the same time. It feels to me now like any coin could potentially surpass the market cap of Bitcoin in a heart-beat. It wouldn't require $1 Tril dollars of investment to flow into another coin. It would only require 1 person (and the market behind them) to agree upon a price that would instantaneously elevate the market cap beyond that of BTC. I don't see this happening... ever. Although, the point is that it's theoretically possible for it to happen in the twinkling of an eye.
That's the part that has me so unnerved. I knew that market cap was dependent on price, but I didn't properly appreciate how few dollars of new investment would be required to dramatically influence the price and thus, the market cap as well. Sentiments which previously seemed asinine, such as, "I don't want to hear anything about market cap, etc... X coin is going to the moon! PERIOD.", now sound a lot more reasonable to me. I get it. Market cap really isn't a boundary. Market cap can be completely arbitrary. It's Dogecoin that has me thinking this way, BTW. If Dogecoin spiking to a market cap in excess of $50 Billion isn't proof of this, I don't know what is.
The first way to apply this newfound information is to cry. It means that nothing is safe and that the volatility we've all come to expect from cryptocurrency is really quite stable relative to what is could be. The speculation happening with the cryptocurrency market can create very real bubbles of value (measured in market cap) which materialize and vanish just as quickly.
It feels safest to think of market cap as a proxy for price, controlled for supply. I'm not sure what else we can say about market cap with any certainty, except that it is an excellent metric for identifying value. If I ignore price and supply, and simply seek value in terms of market capitalization, I can define value in terms of a Growth Ceiling Multiplier GC[x]. The tools of the #DeLoreanMethod remain useful and relevant because investors diversify once goals are reached. When investments reach maturity they are harvested and redeployed. So it's unlikely for any one particular crypto or stock to break away too from all of the others in terms of market capitalization, because investors are inclined to take profits and seek new opportunities. The redistribution effect is ensured because investors always retain the option of selling for another asset.
So market cap does reflect the hypothetical dollar value of immediate liquidation of all of this asset existence.
Thanks for reading! I look forward to engaging with your comments below. Please like, tip, and subscribe if you found value in this post!
#GetInMyDeLorean #FluxCapacitorHyperGrowth #LowCapValue #MetaMarketCap #B2TF #BlockToTheFuture
-NOVAX
Read my previous post: Towards a More Nuanced Understanding of Meta Market Cap [Part 1 of 2]
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