Did you ever try to find the next super cheap coin or token, which you can buy for just a few cents/satoshis? Nothing can go wrong with a 5sat coin, right? Once it shots up to a dollar you’re a made man – so why not take a chance? Or another route: Why not research Coinmarketcap and spread buy orders over all these cheapos?
If it was just that easy… By the time of writing this article, there are a total of 1587 cryptocurrencies on the market, and these are only the ones that have been listed on CoinMarketCap.com. Most of them will be and are nothing more then useless shitcoins, which are going to be wiped out by the market in the upcoming years. Many of them don’t even have an actual use and the cryptocurrency market is over run with new coins day by day – another bunch of ICOs will end, also today and another bunch of tokens will be added. The problem is the money inflow to the crypto markets – it has to hold pace with all that new coins, and even more important, people have to spend that money on those tiny coins to make it grow. So what do you do to take your best bet to find those cheap and promising coins, those of which that have room for an actual growth in value? Let’s get a bit in quantitative analysis and learn how to estimate a coin’s future value by its distribution metrics – the total supply, circulating supply and max supply.
Your Research Base: CoinMarketCap
CoinMarketCap is the base of your research. The numbers you see there might be true or not. Keep in mind they can be rigged or simply false. This is Crypto and these are currencies issued by startups (sometimes scams), so there is always risk involved when you decide to invest in a coin. The higher the reputation of the company behind a coin, the higher the chances that the numbers you see are real. Nevertheless, it is all we have to make an investment decision, so we have to rely on it and make use of the metrics and parameters provided there. First, we need to understand the market dynamics of supply and demand – this is very basic economic knowledge and you can look it up everywhere. In a nutshell, it is about the relation between the demand by the market and the available supply, which results in a value estimation, calculated by the balance or imbalance.
Calculating the Market Cap
The market cap shows the share of the particular coin or token it holds of the total cryptocurrency market. The formula for calculating the market cap is
Circulating Supply x Current Price
Example: Bitcoin – There is a circulating supply of 16,940,025 BTC x $8,496.08 (current price of Bitcoin), which results in a market cap of $143,923,807,602. As we know now, the market cap shows us how many dollars of all the money invested in crypto coins are spent within a particular coin right now. So we might take Bitcoin as a reference in the future to estimate the chances.
The Circulating Supply
The circulating supply is the number of coins or tokens that have been issued to the public and are in use on the market. However, one should consider that there are coins with Masternodes and/or Proof of Stake in the market which distort those calculations, as they are locked or simply held in wallets to generate passive rewards. So keep in mind to research the coins you are in investing in and then decide. Think about certain possibilities, like the reward for a masternode could become decreased, what would that mean for your holdings? Find out how many masternodes are running out there, how many coins are needed to run one, etc etc. Search for upcoming news about the stability in regards to that.
We are humans and it is our nature to let fantasy take over from time to time. So we start to think about finding the next Bitcoin and the next 5 satoshi coin that will take the market over and turn us into a millionaire out of our $500 investment. While things can work out pretty well in young markets like crypto, we must do our research, stay realistic and do some kind of quantitative analysis. Take this as an example:
Bitcoin Circulating Supply: 16,940,025 BTC Bitcoin Price: $8,496.08 Bitcoin Market Cap: $143,923,807,602
Photon Circulating Supply: 22,097,975,747 PHO Photon Price: $0,000046 Photon Market Cap: $1,019,702
So would it be a good deal to invest into Photon for the long-term? Let’s do the math for this obvious example. Of course, I have chosen this one just to emphasize the outcome in a dramatic fashion.
The circulating supply is the 1304x of Bitcoin. So if we want to reach the same price as Bitcoin, we need to reach a certain market cap. To find out which this would be, we multiply the circulating supply of Photon with the one of Bitcoin, which would look like this 22,097,975,747 x 8.496 = 187,744,401,946,512. Total global money supply is 36.8 Trillion (36,800,000,000,000 / only the narrow money, in coins, banknotes and checking accounts). Speaking in Trillions, you can now see 187.74 T against 36.8 T. So we know now it would simply not be possible for Photon to become the next Bitcoin, even if the whole worlds narrow money would flush into Photon. Please apologize for this very exaggerated example, it is really just to make things more visible.
Can we reach at least one buck then?
Ok, let’s do the same example with a targeted coin price of $1. Hey, maybe it can become a $1 token at least and if we bought Photon for $500 at the current price, it would be still some significant raise, maybe enough for a Lambo? The math is quite easy here, as we would have to take the circulating supply and multiply it with one, so for a one dollar token, the circulating supply equals the market cap with a whopping 22,097,975,747 – this means Photon would have to reach around 15.3 % of Bitcoins market cap, which is also highly unlikely with Bitcoin dominance of around 44% of the total crypto market cap. There would be a big shift needed in the top 5 to achieve that and Photon would need to overtake the market capitalization of Litecoin and Bitcoin Cash. So this target is pretty unlikely as well.
More numbers: the total supply and the maximum supply
The Total Supply
Besides these numbers, there is more you can research with other number sets. You also have the total supply and the max supply as available metrics. While total supply doesn’t affect the market cap, it includes the circulating supply, as well as other coins or tokens in existence, like distributed by an ICO or premined coins. So if you consider investing in an ICO, you should definitely take a look at the coin/token distribution. How many are locked up and not going to be released after the ICO? as long as they are not distributed, they are not going to affect the market cap, but once released they will affect the price, so this is something important to research. They might be released as rewards for ICO participants or given out for other reasons, so check out if you find any information about a lock-up period. Furthermore, check the percentages the coin founders keep for themselves and are held in other big wallets. They will likely dump them over time, as they might need funds for their running business if the regular fund generation resources are not working out as projected.
This post is, of course, not about bashing Photon, I don’t know anything about this project and just took it for this example as per the high supply. But let’s dive a bit deeper to find out if it would be worth to invest in it. We learned already that it is very unlikely for it to reach the top 10, but what about the current holders? If you visit now the Photon page on Coinmarketcap you will see an “Explorer” link right under the name. which leads you to the Photon Explorer. If you see some wallets in the top100, holding >60% of the coins, you put your capital to an enormous risk. Imagine how the price would dump, once this person decides to sell all those coins, but also how easy it will be to manipulate the market price.
The Max Supply
The maximum supply is a cap of the available coins/ tokens for a certain blockchain project. Most projects have a hard cap, which means there is a finite number of coins that can hit the market. The mother of all coins, Bitcoin, for example, has a max supply of 21,000,000 BTC. If you compare that to the number of the circulating supply above, you can see there is still some mining to do. However, there are also things like “lost coins”, which are to be considered. For Bitcoin, as an example, there shall be around 3.8 M coins lost as unrecoverable, which reduces the maximum supply by that number. Also, keep in mind that there are very different inflation models for each of the coins. Ethereum, for example, has no hard cap, but follows the proof-of-stake protocol instead of proof-of-work (we will explain the difference between these concepts in a future post).
The conclusion one should source out of this post is to take an intense look at the numbers, before deciding on long-term investing in a coin or token. At first, you find an interesting cryptocurrency project, which you can imagine being successful in their niche in the future. Then let the numbers do their work. There are many models out there, but you first should go and look for the circulating supply, thereafter you process the marketcap calculation. Then compare this marketcap to other, already popular or successful coins and calculate a possible target, where you want to see this coin in the future. Take an anticipated percentage growth you are after. Like you want to sell your investment, once a 50% gain is realized. Check the numbers again, if this is realistic/possible for this coin. To avoid unexpected risks, you want to check for the maximum supply and the distribution of the coin, as well as the “richlist”, that can be found within the explorer.