The most common and highly recognized way of comparing top crypto projects is market cap. If you know the basics skip to the heading Misleading.
The Basics
Market Capitalization (Market Cap) is the total value of all shares (coins/tokens). It is calculated by multiplying the assets last traded price by the total number of circulating assets. For example Bitcoins market cap is calculated by 21,176.53 (last traded price) X 19,095,650 (total circulating supply) = ~404B (Market Cap)
Although Market cap is a fun way to rank crypto projects and get an "idea" of a projects rough value; it can be misleading, fraudulent, or lead to some interesting phenomena.
Misleading Market Cap
In 2018 a hacker by the name of Joseph Harris managed to steal roughly 1B tokens of Crowd Machine worth roughly $14M - at the time the circulating supply was ~470M tokens with a market cap of $5.9M. When he attempted to sell off his $14M worth of tokens in mass he only managed to get a few hundred thousand from the liquidity of those token. The liquidity of the token was only a fraction of the total “market cap” even though he sold off nearly 3x the circulating supply.
Where market cap calculates the "total value" of an asset - liquidity refers to how much fiat can actually be obtained by selling the assets. Without any liquidity, you wouldn't be able to sell any of your assets and they would be worthless, as there would be no one buying them - even if the market cap from the last traded price was over 1B (in practice this wouldn't happen).
Fraudulent/Manipulated Market Cap
When looking at CoinMarketCap occasionally you'll see "Top Gainers" with absolutely astronomical gains. You look at them and think "if only I was a good trader I could have made an easy 200% in the last day."
However since marketcap is only calculating the "total value" of a crypto (based on the most recent traded price), these projects often have extremely low liquidity and as soon as someone with a decently sized supply starts to sell - the price will crash to the floor. Even if you were one of the first people in the door there is rarely enough liquidity to get anywhere near what it says the value is worth.
Another Reddit User goes into greater detail about how he "created" a crypto with a marketcap of $811B in a few hours however since there is no liquidity any sells would absolutely crush the price and market cap.
An Interesting Phenomenon concerning Market Cap
One of the most interesting things about Market Cap is the ability for money to disappear in a dead project.
This is easiest to understand in projects with a fixed price (a stablecoin) that loses its peg. For example, let's say people decide to invest $19B in your stablecoin at a fixed price of $1 each then something happens and the price of your stablecoin is now worth $.04. If people are willing to only pay 4% of the stated value, any money that was in that asset has lost exactly 96% of its value in the amount of one trade. Hypothetically nearly $18B would just disappear in a black hole. This of course is something similar to what happened to USTC.
Back in the beginning of May USTC had a marketcap of roughly $19B and a circulating supply of roughly 19B. Today the marketcap sits around $430M with a circulating supply of 9.82B. Because all USTC was minted at a fixed value of $1 there is over $9B that’s now lost in the USTC black hole, the money essentially just disappeared because the value of the asset is worth less than what it was minted for.
In closing
Market Cap is a fun way to compare crypto assets but it’s not “very” useful especially for low cap projects. What’s more important is liquidity, how much money can actually be taken from the asset in the event of a sell.
If you’re gambling in low cap cryptos or are an experienced trader you probably already know - all of this, but it’s an important lesson nonetheless.
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