EDIT: I want to preface this by saying market cap can still be a good indicator of some things. This post mostly just points out how it is not a representation of the amount of money in an asset.
Market Capitalization in Cryptocurrency is still severely misunderstood. Even by those who lash out at newcomers when they want to buy a cheap coin, ranting about the market cap.
There’s a reason the formula for Market Capitalization in Crypto is generally structured the same way every time:
>Market Capitalization = Price * Circulating Supply
It’s because Market Capitalization is a byproduct of those two factors and not the other way around. There seems to be some wide misunderstanding that Market Cap represents the total amount of money that has flowed into an asset (“Wow! People have spent $1T in total on Bitcoin.), when in reality it’s nothing more than a very rough estimate, *if that*. In reality, if I bought $50B in Bitcoin right now, we would most likely *not* see the market cap move by $50B.
To understand why it’s not a good estimate, you have to understand how prices are set. They’re set by us. More specifically, they’re set by the Bid and Ask spread ([https://www.investopedia.com/terms/b/bid-and-ask.asp](https://www.investopedia.com/terms/b/bid-and-ask.asp)), while exchanges simply provide us with the means of trading, and arbitrageurs keep each exchange at a similar rate. Imagine this scenario, while realistically it will never happen, it is theoretically possible.
>Some sort of new technology has been developed allowing only Bitcoin holders of any amount to communicate. For some reason, every single holder uses this technology and every single one of them come to agreement that will not sell Bitcoin at the market price of $60k, and instead ask for $100k per Bitcoin. For some reason, buyers are still willing to set bids as high as $100k.
Here are two questions to sum up this post:
What happens to the price of Bitcoin?
The Market Cap at $60k was ~$1.2T, the market cap now at $100k is ~$1.85T. Does this mean $650B worth of Bitcoin was bought?