Where does all the money come from when the price surges? How much new money will it take for Ethereum to flip Bitcoin? How did Doge have a $90,000,000,00 market cap? The answer has more to do with perceived value than actual value or the inflow and outflow of money. Let’s dig into this.

PRICE (X supply) DICTATES THE MARKET CAP, NOT THE OTHER WAY AROUND

Market cap is the sum of the last price an asset was traded for multiplied by the total supply

For every buyer, there has to be at least one seller and the transaction is for part of the circulating supply. Therefore, we place our buy orders and sell orders in relation to the price of one individual coin/token. Prices drive the market, market capitalization is a byproduct that has little to do with the actual amount of money invested.

example

Bitcoin has a circulating supply of 19,000,000 coins and at $30,000 per coin it would have a market cap of $570 billion.

When demand is high and buying pressure far exceeds selling pressure, market cap can and will rise by multiples of the amount of money actually invested.

If Bitcoin, with a circulating supply of 19,000,000, gets traded at $30,000 then seconds later, in a frenzy of cancelled and resubmitted buy and sell orders, a trade executes at $30,100 that would cause the market cap to increase from $570 billion to $571.9 billion, an increase of $1.9 billion dollars but it could have been just 1 trade at $30,100 for 1 Bitcoin. Far less money entered the market between $30,000 and $30,100 than $1.9 billion.

Market cap is not equal to money invested or even true value. It’s just a reflection of the last agreed upon price multiplied by supply. It’s misleading when crypto market caps are compared to market caps of traditional assets

__

PRICE AND PRICE MOVEMENTS ARE REFLECTIONS OF SENTIMENT AND OPINION, NOT ACTUAL VALUE

The market price of any asset is the price of the last transaction between a buyer and a seller.

On their own, inflation, deflation, the amount of coins staked, upgrades, scientific methods, superior tech, hard forks, a tweet from the man that wants to be the “I’m not like the other girls” of billionaires, FUD or anything else doesn’t affect price. Our feelings about these things are translated into the only actions that affect price, buying and selling.

Price, like market cap, has little to do with the amount of money flowing in or out of an asset. The flow of feelings, FUD and FOMO, can swing prices dramatically.

A simplified example, but this is how exchanges work and credit to u/DriveLamboToTheMoon for this price example inspiration

Let’s say Ethereum has a current market price of $2,000 and we can look at the order book and see sellers have put sell orders, (ask price) in for 1 full Eth at $2,100 and for every one hundred dollar interval up to $3000. There will also be buy orders (bid price) placed. ^{bUy ThE diP} The first buy order is 1 Eth at $2000 and 1 Eth for every one hundred dollar interval all the way down to $1600.

I want to buy one full Eth. I can make a market order, which in most cases doesn’t actually change the price, or I can place a buy order for 1 Eth at $2,100 and get matched up with the guy or lady that has a sell order at $2,100. The market value for Ethereum is now $2,100

NOTE: there would probably be transactions in between this on a *normal day for fractional amounts of Ethereum. I mathed easier numbers here as I did with the market cap example. You get the idea though*

What if it’s not a NORMAL day and emotions run high?

fictional fud All over Reddit and Twitter the news breaks that EIP-1559 will be delayed until mid 2022. Emotions and GWEI run high.

The highest sell orders, $3000 $2900 and $2800 get canceled because they know the moon shot is moon dust now and the buy orders that were just below the market price, $2000 $1900 and $1800 get canceled because the buyers think this news may cause a larger drop in price. There have been no sells yet, just canceled orders. The $1700 guy decides he doesn’t want to catch the falling knife after all and cancels.

The buyer that placed his buy order at $1600 was prepared for this and the seller that had the sell order at $2200 isn’t a HODLer and thinks the delay may keep the price down for a long time and he wants out now so he enters a sell order at $1600. The price of Ethereum is now $1600

The cancellation and/or addition of buy orders and sell orders in a short time frame by enough people can dramatically affect price. It doesn’t take a “whale” buying a large amount. This is how price can fall or rise rapidly when sentiment suddenly changes. Buyers expect a lower price and cancel orders. Sellers become less hopeful and enter sell orders for lower prices.

Ethereum is still the tried and true Ethereum, nothing happened but news and a sentiment shift. It’s value is the value we assign it based on opinion.

TLDR: In crypto, the only use for market cap is measuring risk vs reward against Bitcoin. Price determines market cap and buy orders and sell orders based on opinion determine price. Technically, Enough people can drive any shitcoin to any price or market cap.

TLDR: Technical analysis of crypto is the study of human emotion, behavior, and perception.

Edit: Formatting