My question is about the market cap figure on coinmarketcap.com and dealing with crypto currencies.
So yesterday the market cap was at 720 billion dollars. Today it's below 600b$.
Does this mean that people have converted 120b$ worth of cryptocurrency into regular currency?
I mean, I get that the value of a specific coin is driven by the number of people buying vs selling. But if they would sell crypto A and for the same amount buy crypto B, wouldn't the total market cap remain the same?
At face value, 'Market Capitalization' is a simple calculation:
Number of units in the market * market price = Market Capitalization
So the market capitalization of Apple is equal to the number of shares outstanding (860 Million) * the share price ($175) = 150 Billion. [I am ignoring complications regarding other non-common share instruments outstanding for Apple, for simplicity as this is a question about bitcoin].
But, what does it actually mean for Apple to have a market capitalization of $150B? Basically, it means that 'the market' (meaning, the average of all investors who trade apple shares, in particular the institutional investors like pension funds, who analyze these things and make the bulk of the trades) believes that the current value of all future Apple cashflows to shareholders (ie: dividends) is worth about $150B in today's dollars.
So if Apple announces a new desk with screens for legs and voice-command drawer openings, and investors believe it will make Apple a lot of money, then they will demand a higher price to sell their Apple shares. If the estimated value of Apple's future dividends increases by 30% in the eyes of 'the market', then Apple will now have a market capitalization of $200B. For this to happen, no one even needs to trade more than a single share. If one single share gets sold at $262, then that gets listed as the current market price for Apple shares. This means that a change in market capitalization denotes a change in the market's view of the value of all outstanding financial items. It does not necessarily denote an actual movement of cash.
Of course, it is possible for a cash movement to change the market capitalization of an item. For example: assume Apple runs out of new ideas, and they announce that they will continue producing current products, and once those stop selling, they will simply close shop. In the meantime, because they sit on a lot of cash that they use for R&D, Apple could pay out a massive dividend - say $10B. So if they did this, the market capitalization would decrease by $10B, because the company would be worth $10B less. Now this is critical: the price would likely then continue to drop, probably by over 50%, because people hold Apple shares on the assumption that Apple will continue to innovate. Most tech companies have the majority of their value in future anticipated earnings, far in excess of anything that they currently own or do.
Now if you look at something like a currency trade (say, betting that the USD will strengthen over the GBP), then the sum total of all currencies in the world effectively stay stagnant. These are ratios, not investments in themselves. If you buy GBP and the UK economy grows exactly the same as the US economy, then your GBP will be worth exactly as much USD as when you bought it (in general, for simplicity). But if you buy Apple, and Apple grows and IBM grows too, then your Apple shares are still worth more USD, even though IBM also grew.
What does this mean for bitcoin? Bitcoin is, remember, a 'currency'. Meaning it does not produce inherent value. It is only a medium of exchange. If bitcoin drops from $20k / BTC down to $10k BTC in the span of 1 month (hypothetically, of course), then the market capitalization will be cut in half.
So, the price drop that you might see in a given currency pair [including bitcoin, if you want to consider cryptocurrencies], is above all else simply an assessment by 'the market' that your chosen currency is not worth as much as it was yesterday. And this is why any type of foreign exchange trading, particularly unproven cryptocurrencies carries a high degree of risk, and is not suitable for long term investment.
It does mean that some people are taking money out, but it does not mean that $120 Billion has been converted to cash.
The current price of bitcoin (or a stock, or anything in an exchange) is simply a reporting of the most recent trades. And the market capitalization is calculated by taking the current price and multiplying it by the total number of bitcoins in existence (or shares of stock, or whatever). Market cap is simply a theoretical total value if everything was to be sold at the current price.
However, it wasn’t all sold at the current price. Most of it was not sold, and the people still holding might have a different idea of what the value is. The current price only reflects the value determined by the most recent buyers and sellers.
In many cases, no. Say you own a house, are trying to sell it at $200,000 and half of it burns down. You obviously have to reduce the asking price significantly if you want to get it sold, even though no money has changed hands nor has any transaction taken place.
This can replicate across all asset classes in any case where buyers and sellers all have to acknowledge that the true worth of the thing they were bidding over is much lower than previous estimates due to new information etc.
It's also worth noting that if you need to ask questions like this the odds of you having any trading edge whatsoever in any public market is close to zero, and trading anything other than a paper account until you have a sustained track record of winning is a near certainty to lose you money above and beyond what would occur just buying and holding the asset in question.
No, in a real market typically it means some people have cashed out but hypothetically it could happen without that change.
Lets imagine a hypothetical extremely simple market with a number of people offering to buy and sell a cryptocurrency in, say, dollars.
Lets imagine that there's 1,000,000 ExampleCoins in existence.
You have a look at the market to see what the buy/sell offers are like.
A: selling 300 ExampleCoins @ $10000 each
B: selling 100 ExampleCoins @ $1000 each
C: Buying 1000 ExampleCoins @ $999 each
D: Buying 100 ExampleCoins @ $100 each
So the current market price is about 999 per ExampleCoin. So the market cap on ExampleCoins is about $999,000,000
Then person C loses their confidence in ExampleCoins. They cancel their offer to buy at $999.
A: selling 300 ExampleCoins @ $10000 each
B: selling 100 ExampleCoins @ $1000 each
D: Buying 100 ExampleCoins @ $100 each
A little while later Person E comes in and offers to sell their ExampleCoins at 101 dollars each.
So now the market looks like this:
A: selling 300 ExampleCoins @ $10000 each
B: selling 100 ExampleCoins @ $1000 each
E: Selling 10 ExampleCoins @ $101 each
D: Buying 100 ExampleCoins @ $100 each
Now the market price for ExampleCoins is 100
The market cap is now 100,000,000
899,000,000 has been wiped off the market cap of ExampleCoins but nobody has sold any significant number of them.
