As the price of a cryptocurrency goes up or down, its total value is typically described with reference to its market capitalisation. In the case of a crypto such as Bitcoin, market cap is calculated as follows: The total number of coins on issue, multiplied by their price.

But according to Julian Hosp — co-founder of cryptocurrency TenX — the metric has some serious limitations in determining the actual value of a digital coin. In commentary on the risks facing the crypto market for CNBC, Hosp explained his point as follows: “If a cryptocurrency has a market cap of $1 billion, it doesn’t mean that $1 billion has flown into that cryptocurrency,” Hosp said.

“So, for a cryptocurrency to have a market cap of $1 billion, maybe only $50 million actually moved into the cryptocurrency.” “Therefore, if that coin collapsed completely, its market cap would go from $1 billion to zero, but investors would have actually only lost $50 million.” So a given coin’s market capitalisation is therefore heavily dependent on the number of coins on issue, which appears to be at the discretion of the coin’s creators when they launch an Initial Coin Offering (ICO). The ICO process differs somewhat to when a company lists on a stock exchange via an Initial Public Offering (IPO).

In that scenario, the sale of share is facilitated by an intermediary — typically an investment bank — who underwrite the sale. The investment bank aims to price the shares at a level so the float is fully subscribed – and in doing so, that process also sets the company’s market value.

Advocates of Bitcoin argue that part of its value proposition stems from the fact it has a finite supply of 21 million coins, which means those in circulation aren’t just made up on a whim. However, doubts still remain about how many of the Bitcoin mined so far — around 16 million — are actually in circulation. Read more from…

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