One aspect of cryptocurrencies seems to be misleading thousands of investors every day: their impressive U$ dollar market capitalization. We noticed that this metric is used heavily by investors, but there’s an elephant in the room: the numbers you see are fake.
First of all, we need to discuss how these market capitalizations are calculated, and once we do that, you’ll immediately see why crypto market caps can’t be real.
After an ICO, airdrop or a fork, new coins appear literally out of nowhere. Some are tokens that live in smart contracts in the Ethereum blockchain, others are coins that have their own blockchain, mainnets and specialized wallets. Whatever the generation process is, an X number of new coins now exist somewhere.
The first thing you need to do after a coin is created, is work hard to get it listed in one of the big crypto exchanges. Normally there’s going to be a community that believes in the new coins and have invested in the ICO (or some other generation process). This community can be rallied to vote for the new coin to be included at Binance, Bittrex and so forth.
Once accepted on a large exchange, the coin is then listed as a trading pair. Some examples are Ethereum/Bitcoin, ADA/Bitcoin and so on (note that there won’t usually be a U$/NEWCOIN pair). This new trading pair now shows up just like a traditional stock market trading system, with bids, asks and a system that matches the highest bids against the lowest asks and performs a best possible trade for investors.
But unlike traditional stock markets, instead of trading U$ for stocks, you trade one crypto for another. So instead of having trading volumes measured in U$, you’ve got volume measured in pairs of cryptos.
As you can see, there is no direct conversion to and from U$. The only cryptocurrencies referenced to the U$, Euro or any other major currencies, are the ones being directly bought or sold in those local fiat currencies. And that means 99,9% Bitcoin.
So why is it all fake?