I have noticed that a lot of people in cryptocurrency don’t understand what market cap truly indicates and thought this would be helpful to many.
Market cap is based on what people are willing to pay times the amount of coins/tokens. The market cap has nothing to do with how much money is in the market, it’s how much investors are valuing it at.
Example: Say there is a total supply of 1 million coins they they were all originally sold at 1 dollar a piece. There is 1 million dollars invested at this point. Now say 900,000 coins are being held and not traded at all and only 100,000 coins are being traded. This creates a supply and demand. Now say the 100,000 coins that are being traded get sold at an average of $2 a piece cause everyone wants to buy and nobody is selling.
So we have actual money of 1.1 million invested, but a market cap of 2 million. This is very simplified and is much more complex. There is no true way to know how much money is actually in the market.
What gets scary about this is that say the 100,000 coins get sold at an average of $5 instead. Now we have 1.4 million of actual money in the market and a market cap of 5 million.
So when you see the market cap drop by “by the billions” in a day, doesn’t mean billions are leaving the market, just means there are more people selling than buying.
Let me know if you found this helpful. Thank you