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Nathaniel Whittemore @nlw
, 33 tweets, 12 min read Read on Twitter
The most common metric in crypto is also one of the most flawed.

+How did market cap come to dominate our thinking?
+What are the critiques?
+Most importantly - what are the alternatives?

A thread. 👇
2/ How we measure success shapes the actions we take to achieve it. This is especially true in crypto, where our understanding of value is nascent and highly reflexive. Any metric that can be gamed, will be gamed.
3/ Recently, while riffing with @ClayCollins on the state of metrics in the crypto markets, we both got a little obsessed with digging into the market cap measure - at once standard and problematic. The result was this essay (which this thread summarizes).…
4/ Market capitalization is a metric borrowed from the stock market, measuring price x supply. Interestingly, a report by Wisdom Tree suggests that market cap may have been, in part, an accident of history due to the ease with which it is calculated.…
5/ There is a fair bit of variety in how crypto market cap is calculated. Price tends to be a composite of the spot price from indexes. Supply, as we’ll see, is a whole different beast. Check out @BitwiseInvest methodology for a best-in-class example.…
6/ As standard as the use of market cap is, critiques are quite prevalent as well. When we dug in, we found four major categories of criticism:

1) Tokens /= stocks
2) Inflation schedules
3) Issues with ‘Circulating supply’
4) Redemption Impact
7/ Critique 1: Tokens ≠ stocks. Stocks are a claim on future profits/participation in a liquidity event, and come with rights. Tokens don’t. The price of a token, at this stage, is almost entirely a speculative assessment of the future value of the cryptoasset network.
8/ Critique 2: Inflation Schedules. Market cap works with stocks in part b/c supply is fixed. Tokens, meanwhile, emit at variable rates, making it difficult to compare both one crypto market cap to another that could have totally different %s of total token supply issued.
9/ The inflation schedule problem is a good place to hone in on the challenge of gaming metrics. If higher market cap = better crypto, it creates an incentive for networks to mint more tokens faster for perceived higher value, whether that’s right for the network or not.
10/ Critique 3: Circulating Supply issues. Most coin rankings use circulating supply rather than total supply. In response to one critique, @VitalikButerin pointed out that circulating supply was adopted to address projects manipulating their market cap…
11/ The general critique of circulating supply is that it tends to over-estimate the supply that is available at any given time by failing to address inactive coins that were either lost over time, airdropped and never claimed; etc.
12/ Critique 4: Redemption Impact. Many have observed that market cap spot prices wouldn’t hold in the case of real world activity. Redemption Impact is a new term we created to describe how likely significant buy and sell activity around a token is to change that token’s price.
13/ Redemption Impact was inspired by ETF guru @gaborgurbacs, who wrote about a comparable type of redemption test on the underlying market price in other asset areas.
14/ For anyone interested, in our research, the idea of Redemption Impact was one of the most interesting and potentially relevant, but we’ve yet to actually have a chance to actually model it out and perfect it. Would love to collaborate here. DMs are open.
15/ There you have the critiques of crypto market cap. Luckily, crypto is a network of creators, and right now, there are many exciting improvements and alternatives being proposed.
16/ In our review, we divided things into Improvements - attempts to make market cap-like metrics better; and Alternatives - totally different ways to measure the value of crypto asset networks.
17/ Improvement Concept 1: ~Fully Diluted Market Cap. FDMC attempts to normalize circulating supply to make market cap’s more comparable by using the supply at a fixed future point. @OnChainFX has been a pioneer and @FredWilson has blogged about it.…
18/ Two challenges with ~FDMC.1) Some protocols have continuous inflation even beyond that future fixed pt. 2) Supply issuance inevitably impacts price, making it highly theoretical. Still valuable for sure, but like a hydra, you try to solve one problem and two more pop up.
19/ Improvement Concept 2: Introduced by @Nic__Carter @khannib Realized Capital is an attempt to get a more accurate supply by removing lost, dormant or never-activated coins. This was one of the exciting developments that inspired this post initially.…
20/ One challenge with Realized Capital that Nic himself pointed out is that it can’t easily tell the difference between long-lost coins versus long-term holders. Still, if we're comparing, that seems like a better issue than ignoring the 4m estimated lost BTC, for example.
21/ Improvement Concept 3: Market Value-to-Realized Value Ratio. Building off the Realized Cap work, @MustStopMurad @kenoshaking’s MVRV incorporates market cycle analysis by determining how comparatively over or under valued an asset is at any given time.…
22/ One particular utility of MVRV Ratio is that it can make estimates about where the market has underpriced Bitcoin relative to its base-level value to the buyer-holders who aren’t subject to market manias.
23/ Value Assessment Alternatives 1: Volume & Liquidity. Many observers use measures of volume and liquidity as an alternative (or as a complement) to market capitalization. A few examples.
24/ One popular indicator is the Network Value to Transaction Ratio (NVT) popularized by @woonomic, which is an indicator of the strength of a cryptoasset as a payment network/settlement layer as compared to market value.…
25/ Recently, there was a fair bit of chatter around the concept of “Buy Support." Pretty quickly, however, the community called out the problem with using public buy orders as a proxy for liquidity.
26/ Speaking of fake metrics that lead to people gaming the system, while it’s a little beyond the scope, check out @ArtPlaie’s indictment of crypto trading volume…
27/ Last on the liquidity/volume front, @CryptoRae has been actively tracking “Retail Trading Volume” in an attempt to understand what percentage of overall volume is coming from retail (i.e. new money) vs. traders). Lower RTV means fewer inflows.
28/ Value Assessment Alternatives 2: Security. In the same presentation where he introduced Realized Capital, @nic__carter also shared the idea of Accumulated Security Spend, which looks at aggregate miner sales over time as a proxy for network value.…
29/ @_CryptoChat_ explored the relationship of security and network health with his “Fee Ratio Multiple” which looks at what it would take for PoW chains to secure themselves exclusively through Tx fees vs block rewards.…
30/ Value Assessment Alternatives 3: Community/Network Health. Value of a crypto network is more than just investment action. Some sites like @CoinGecko are trying to include indicators like social networks & dev activity to balance market cap & volume.…
31/ @cryptolabcap is doing something interesting with their Network Value to Metcalf (NVM) ratio - which tries to understand whether an asset is relatively overvalued or undervalued as compared to growth in its network of users.…
32/ In summary, crypto market cap is an imperfect measure at best, and genuinely distracting at worst. At the same time, there is lots of reason for optimism at the pace of development of new alternatives.
33/ By improving the metrics by which we measure network value, we don’t just make it easier for traders to compare coins, but make it easy for teams and communities to benchmark their work to make their networks value. Better metrics mean better networks.…
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