One of the main issues with using market capitalisation as an indicator of cryptocurrency investment value is the fact that locked up cryptocurrencies can easily be overlooked by investors. There are significant amounts of cryptocurrencies that are either not in circulation or lost.
Market Capitalisation and Cryptocurrencies
Metcalife’s Law
Metcalfe’s law can serve as a better resource for comparing cryptocurrencies. The law states that a value of a network is proportional to the square of its number of users. It measures the value of a network. Analysts use it to predict when best to leave a market. Researchers using the law can predict market crashes using data from the past. The law is based on the assumption that the measure of value for cryptocurrencies is base on the network of people who use the cryptocurrencies. Researchers assert that once Bitcoin is valued using this method, it will become possible to determine whether it is overvalued. Users on a network reflect the amount of activity on a cryptocurrency taking place.
A potential disadvantage of Metcalfe’s law is that it may not present a clear picture of the reasons for an increase in users on a cryptocurrency network. A cryptocurrency network may have low transaction fees which increases the amount of users on it but trading volumes may not be proportional to the user base.
Liquidity
Liquidity of a cryptocurrency can shed light on the trading activity taking place. Low amounts of trading could be indicative of high risks of dumps by groups who hold most of the coins. Monthly volumes can also serve to give a clearer picture of market demand for cryptocurrencies. Monthly volume may be considered as a better indicator for investments than daily volumes. Daily volumes are harder to base decisions on due to volatility.
Edel is an Editor with a decade of print and digital media experience – specializing in Science, Technology, Finance, Entertainment, and Advertising. He is also a stock and cryptocurrency investor. When Edel is not editing or analyzing charts, you can find him with his DIY lightbox taking timelapses of plants.