A Case for a new Method of Evaluating CryptocurrenciesNovember 20, 2018
Today, the most used metric that is is employed for comparing different cryptocurrency projects is their market capitalization. However, this represents a metric that is exceedingly flawed. Critics have observed that poor liquidity that is added to exchanges that utilize relaxed rules, allows founders and crypto holders who possess large sums to easily manipulate the market capitalizations. The same values are then broadcasted by cryptocurrency media outlets and end in the public domain as stone-cold facts.
This phenomenon was one of the main reasons that contributed to the ICO mania of 2017, which in turn led to the huge expansion of the cryptocurrency values. However, this is not the only reason why market capitalization is not the best alternative to measure the core worth of a cryptocurrency. Here is a detailed look into an argument that the world could use a different way of measuring and evaluating the huge range of digital currencies that currently exists or is being created and launched in the near future.
The Philosophical Issue with Market Cap
Aside from its basic problems, many argue that there is an embedded and practically philosophical problem related to the use of market capitalization. This benchmark is in US dollars and the same measure implies that the success of a crypto project is devised against its effectiveness in making a fiat currency exit with the funds. In other words, a cryptocurrency is successful if an investor who purchased it can sell it using a higher price and thus generate a fiat profit.
This is a problem for an industry rooted in the continued effort to create a new form of economic and financial transactions that are based on the non-fiat value exchange. At its core, the use of fiat is a basic contradiction. What is worse is that it encourages bad and malicious behavior. That process, however it might be interpreted, is placing priority on the return on investment in US dollars and this fosters a mentality that creates a specific type of community. It mostly attracts coin-pumping traders and not those who feel passionate about the software that is running the networks or the business developers who want to build successful decentralized ventures that are working in the crypto-economic ecosystem.
However, in spite that many see this clearly, the pump-traders and YouTube advisors are common-place and apparently, rising in numbers. Like with many other digital domains, including social media and esports, there is a certain gravity of social relationships that attract an audience to individuals like this. But, numerous they might be, they are still not the holders of monopoly over the entire culture of crypto. There is still plenty of different type of people being drawn to the crypto domain and not all are there just to make a quick and literal buck.
The Communities Crypto Project Attract
More than any asset out there, crypto tokens are mainly defined by the communities they are attracted. All of these are collectives of individuals, gathered ad hoc and motivated by the principal set of ideas behind a token or network. Most if not all of them are defined by the tendency towards the proposition that the decentralized economic ecosystem is a beneficial step forward in the evolution of global finance.
Of course, there are plenty of bad ideas, even core ones, behind many tokens, especially the flood of altcoins that came during the boom of 2017. Also, communities might form and work together, but their shared passion and commitment is never uninformed.
The development of features or sticking to the white paper timeline also vary greatly. But, in spite of all potential failings of perceiving the crypto domain through communities, they are one of the most stable metrics. They are also a definite insight into the way how the cryptocurrencies can be observed completely independently of the dollar-based price.
The Crypto-Economics Explorer
Thanks to all of this, one of the biggest entities in the field of cryptocurrency media, CoinDesk, is launching a service called the Crypto-Economics Explorer. This mechanism both downplays the value of the cryptocurrency in dollars but also elevates a set of other benchmarks that define a crypto project. Essentially, this is a multi-dimensional representation that includes a range of measures for each project.
Market cap and price is just one of the five different dimensions. The others include on-exchange transaction, social media activity, developer activity, and on-blockchain transactions. Through this lens, the cryptocurrencies can be compared and observed in relation to one another. Zcash is a cryptocurrency that strongly performers when it comes to developer engagement, coming from the community of cryptographers who support the token development. However, it features a small number of transactions and has little engagement in social media.
XRP, on the other hand, has a crypto-economic setup that seems the complete opposite – it features a strong level of social media engagement rates, especially on Twitter and other relevant online locations. The community of developers is focused on a team located in-house by Ripple itself. Because of this, it would be easy to discard XRP as a shallow project that will fail.
However, the whole point of the system is to take all factors into consideration and social media engagement is one of them. In that sense, zcash and XRP would be, oddly enough, at a similar overall footing. Bitcoin, for example, which is a strong performer in all of the domains thanks to its generally dominant nature, would be one that trumps over all others and across all dimensions.
The Complete Solution
The crypto-economic explorer is not a perfect solution, but it is without any doubt a step in the right direction moving the analysis away from the market cap. Yet, like all movements forward, it takes the previous steps into consideration and thus takes market cap value into consideration as well. Thanks to this, the process of the CoinDesk is one of expansion of data input, which has proven itself time and time again across many industries.
Hopefully, here as well it could help with the next step in the cryptocurrency evaluation process. It is definitely not neatly tying all into a harmonious system but the effort it makes is crucial for not just the cryptocurrencies themselves, but for anyone that has anything to do with them as well.