Coinmarketcap Data is Misleading

2019-01-29T14:48:09.000Z Honest Cash

https://www.reddit.com/r/btc/comments/al0brr/stop_relying_on_coin_market_cap_their_data_is/

I was just reading this thread and it dawned on me that most people are still very much unaware that Coinmarketcap.com does not give you an accurate picture of the cryptocurrency economy or space. For at least three simple reasons:

  1. CMC uses exchange data, exchanges price all alts in BTC which causes BTC's moves to move the whole market (which is wrong)
  2. CMC uses exchange 'price' data, which is just an average across exchanges. This doesn't sound so bad until you realize you can manipulate the market by manipulating the 'avg price' (averages are easy to manipulate), or the number of markets.
  3. Market cap is supply * price. #1 and 2 talk about the problems with price, but this one talks about supply; supply is an arbitrarily chosen number, and thus cannot be compared between coins without some form of levelization.

So clearly, from these three issues, the values and market caps you'll see on CMC will likely be heavily manipulated, because these three flaws make it easy. Let's take an example. If you were to go by coinmarketcap, you would think that Monero is a larger, more widely used and invested in coin than Dash. Monero's market cap is $730,160,663, while Dash's is a mere $585,068,699. This would give you the wrong impression that Monero has more investment and economic activity than Dash. How? Mostly because of #3 above. Monero has twice the issued supply as Dash and a much faster initial emission rate.

Yet Dash has much more daily economic activity than Monero. You can see from coinfairvalue.com that Dash had about 12,082 transactions in the last 24 hours, while Monero had 3,214. Dash is accepted at over 4800+ stores globally according to discoverDash.com, while Monero is only accepted at around 20 IRL stores and 100 online. Clearly something is off here and we can see exactly the problem. The doubled supply of Monero.

So small movements in price dramatically affect its marketcap relative to Dash. This must be accounted for if you are going to compare apples to apples. If you remove #3, by relying on the same supply for each during the comparison, you see a much clearer picture, Dash = $585,068,699 while Monero's mkt cap becomes $374,523,774.46. As you can see, Monero is actually a bit smaller here. What about #1 and #2? Well, its really hard to fix those two. However, an easy work around is to use fair value instead! This website calculates the 'fair value' of cryptos and compares them in order to get a better visual on the economy of the coin in question.

What is 'fair value'? To understand it, understand what exchanges and coinmarketcap are doing. Exchanges are taking an average of the sale of cryptos and reporting it. This is being called the average price. But that price is determined by the investors making the trades and the information they have. This is why we have 'price discovery', to figure out how much the cryptos we're trading are really worth. Exchanges do not make their trades on the chains they are trading until they send you the crypto. So most exchange data is not indicative of the actual crypto economy that you're trading, its more like a proxy.

Fair value on the other hand, relies on four intrinsic fair values, i.e. properties that are themselves fair values, and thus the fair value of a coin can be represented as a function of these four fair values. In this way, we can represent intrinsic economic activity on the actual chains we're comparing. These values are

  1. Velocity
  2. Basket (avg. transaction size)
  3. Total discounted supply
  4. daily transactions

These are combined in a mathematical formula viewable here, that results in a price estimation that is independent of any exchange data (remember both exchange data and fair value are merely approximations or estimations of price). The best part is, the math behind the theory dictates that when all speculation is removed from the equation, the fair value and the price should match. This means that if they do not, it is due to speculation! Which means that fair value gives us a way to see speculation in the cryptoeconomy as well as an accurate estimation of the wealth in it at any time!

Summary:

The price you see on Coinmarketcap.com is very misleading due to the fact that it doesn't correct for the 3 systemic flaws that corrupt the data above. This causes a skewed interpretation of the crypto-pricing space. Although price and fair value match eventually, meaning the speculation is eventually dealt with, in the meantime (years) there is a lot of speculation and outright manipulation going on under the cover of the three above.

Let's take our example above. Monero's fair value market cap is $281,910,167 while Dash's is $3,209,415,782 or more than 11x larger! Monero's fair value is harder to accurately calculate than most, indeed there is an uncertainty of around 80% wrt to the calculation. However, it possess 2 out of the 4 fair values, and since they are themselves fair values and a coin's fair value is merely a function of these four fair values, by substituting data from USD Monero's fair value is able to be calculated. This is evidenced by the frequent price/fv convergences Monero experienced before Apr 2017, the month Dash's price began to rise and the bull run of 2017 followed.

Or look at coins like PIVX and ZCash! Their fair values are relatively high compared to their prices showing their economic activity and investment is higher than price and marketcap are showing. Thus, they are likely undervalued at this time! PIVX has a price of $6.74 and a fair market cap of $382,557,995, nearly ten times its exchange based market cap of $41,579,255. Similarly with ZCash at a fair market cap of $567,637,117 vs price-based market cap of $282,594,340. Very undervalued if the theory is correct. Which the convergence of every coin's fair value with its price over time indicates is the case.

This dramatic disparity is possible because exchange data is not related to the economic activity on the coin, they are at best a proxy for it, thus there is a lot of wiggle room to hide manipulation. Fair value exposes this and provides us with a needed mathematical tool to give us the ability to see through that manipulation. As you can see, completely opposite to the price, fair value shows that BTC and the entire market (except oddballs like Monero) have been growing in value since the hash war of Nov 15 cratered the price. BTC's fair value is currently $8,604.11 up $200 from 2 days ago, compared to a price of $3,416.96. Dash's fair value is $373.44 compared to a price of $68.16.

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