Does the price of a coin tell you what it's actually worth?
Value vs. True Value
If you’re new to the world of crypto investing, you’ll hear a lot of different terms being thrown around. In this article, I will cover a few basic terms, which, unless completely understood, could make or break your entire portfolio. These terms are “Market Cap”, “Circulating Supply”, and “Total Supply”.
Fully understanding these terms is vital because they are directly related to a coin’s TRUE VALUE.
Even though you may have a basic idea as to what these terms mean, it’s more important you understand how they relate to each other. Once you understand how they’re inter-related, you can then apply TRUE VALUE to any coin. What do I mean by True Value and how is that different from the actual coin Price?
Take a look at the coin market cap chart below. Out of the top 10 coins, which one would you say is the best value?
Many would guess Cardano because it’s only trading at $0.68 cents? But is that really the case? Remember we are talking about “True Value”. We’re all familiar with the phrase, “If it’s too good to be true then it probably isn't”. The same can hold true when it comes to the price of some crypto coins.
There’s a reason why Cardano is ranked at #5 and NEO is only ranked #9. Even though Cardano’s price is at $0.68 cents and NEO’s at $151.23, Cardano is the more expensive of the two. How can that be?
The answer to that question can only be satisfied by first looking at Cardano’s Circulating Supply. We see that its Circulating Supply is 25,927,070,538 billion coins. Now what exactly is the circulating supply of a coin and how does it relate to the Actual Price?
All cryptocurrencies are not created equally. Some are created with finite supplies, meaning their supply is capped to a fixed number and other cryptos are created with an infinite supply, meaning there’s no hard cap set for that particular coin.
Supply Types
There are 3 different types of supply for any coin.
Circulating supply: Circulating Supply is the number of coins circulating in the market. These coins are all the coins currently available for trading. This doesn't mean they have to be traded but means they can be traded. Ex. You can be holding some of these coins in your wallet but they are still considered part of the overall circulating supply since you can trade them at any time)
Total supply: Total Supply is the number of coins that are in existence. With the exception of circulating supply, the balance of these coins are not yet in circulation but can be released at any time.
Maximum supply: Maximum Supply is the number of coins that can ever exist for that particular cryptocurrency so no more can ever be created.
Let’s take a look at Cardano’s supply numbers.
As you can see Cardano’s Circulating Supply is 25,927,070,538 Billion coins. This represents all of the Cardano coins currently available in circulation for trading.
Now look to the top right at Cardano’s Total Supply of 31,112,483,745 Billion coins. This is the amount of Cardano coins currently in existence. Though all of these coins have not been released into the circulating supply, they could be released at anytime. That’s very important to know and we’ll talk about that later.
Lastly, at the bottom right we see Cardano’s Max Supply which is 45,000,000,000 billion coins. These are all of the Cardano coins that can ever be created.
Now we know what the actual supply numbers are and understand their meanings, how can we use this information to reveal Cardano’s True Value?
CIRCULATING SUPPLY
To do this we first have to start with Circulating Supply. If we were to take Cardano’s Circulating Supply of coins 25,927,070,538 and multiply them by the current price $0.68 cents we would get a total of $17,882,833,925 USD. If you take a look at the image above you’ll see that this is the same price as the Cardano Market Cap. That’s because this is how a Market Cap is calculated. (Market Cap = Price x Circulating Supply)
So the Market Cap tells us much more about the TRUE VALUE of a coin than does its actual Price. Why? Because the coin is just one coin and represents only a fraction of the company’s over all value. But the Market Cap represents all the coins together or the entire value of the company’s coins supply. Since all companies do not have the same amount of coin supply, the price of each coin becomes less important.
To illustrate: what has more value, (1) $1 bill or (100) pennies? Obviously, they have the same value even though there’s only (1) $1 bill. Just because you get (99) more pennies it doesn’t mean the pennies have more value. This is because each penny is only worth 1/100th of a dollar bill.
This same thought process applies to coins. Let’s look at the image below.
Cardano is trading at roughly $0.68 cents and NEO at $151.00. So for $151.00 you can purchase (1) NEO or (223) Cardano. No matter which one you purchase, just like in the dollar and penny illustration, the value is the same. To reiterate, the amount of coins you get for your purchase becomes less important.
Though these illustrations well explain the overall supply value, what we really need to understand is the TRUE VALUE of each coin. Going back to our purchase of NEO and Cardano, which has more TRUE VALUE? To do that it’s not very difficult because we have all of the numbers needed (Price, Market Cap and Circulating Supply).
Let’s take Cardano and NEO and put them side by side for comparison:
Cardano (Price) = $0.68 (Market Cap) = $17,884,026,570 (Circulating Supply) = 25,927,070,538
NEO (Price) $151 (Market Cap) = $9,830,210,000 (Circulating Supply) = 65,000,000
Looking at both coins we quickly see NEO’s price is much higher, Cardano’s Market Cap is almost double that of NEO’s, and it’s Circulating Supply is almost 400X more.
Since the Market Cap is a main number we need to focus on, because Market Cap is what the entire company is valued at, let’s use that number to do some quick math.
For NEO’s entire coin supply to hold the same value as does Cardano, NEO’s Market Cap would also have to be the same. So if we take Cardano’s Market Cap of $17,884,026,570 and applied that to NEO, what would NEO’s price actually be?
The formula looks like this:
(Cardano’s Market Cap / NEO’s Circulating Supply = NEO’s New Price) $17,884,026,570 / 65,000,000 = $275.00USD
So if NEO had the same Market Cap as Cardano, NEO’s price would then be $275 per coin. In short, even though NEO is currently trading at $151 USD, it’s overall market value is much lower than that of Cardano’s.
Now, this isn’t to say NEO is the better coin. A lot more has to be factored in to figure out which coin is the better investment. But it’s very important to understand, just because a coin’s price may look cheaper, it not necessarily the cheaper coin.
TOTAL SUPPLY
This leads us to our last part of the discussion. Total and Max Supply.
It’s important to understand that even though Circulating Supply can tell us the overall Market Cap or worth of a company, that number is not always set in stone! This is because the Circulating Supply may not represent the Total or Max Supply that can be dumped into open market at anytime. If and when this happens, a coin’s value can greatly decrease. Again, let’s use Cardano for illustrative purposes.
Currently, Cardano’s Circulating Supply is 25,927,070,538 billion coins but we see its Total Supply is 31,112,483,745 billion. Since this Total Supply represents all the coins currently in existence, if you were to take the Total Supply and minus it from it’s Circulating Supply, the formula would look like this ( 31,112,483,745 - 25,927,070,538 = 5,185,413,207). That means at any time Cardano could decide to dump another 5,185,413,207 billion coins into circulation.
So an important question is, if this were to happen, how could this affect Cardano’s Coin price?
Again we have all the numbers needed in order to give us an idea of what could happen. As we’ve learned, to get a coin’s price we need to take, Market Cap / Circulating Supply = Price. This gives Cardano a new circulating supply of 31,112,483,745 billion coins.
So, 31,112,483,745 (Circulating Supply) divided by $17,884,026,570 (Market Cap) = $0.57 cents.
If these new coins were suddenly added into the market, then Cardano’s price would drop from $0.69 cents down to $0.57 cents.
MAX SUPPLY
Now, remember, this is not the end of the matter since more coins can still be created and dumped into the market. That’s where the Max Supply comes into play. Taking a look at Cardano one last time let’s do the math.
Once the max number of coins has been created and put into circulation, Cardano’s new circulating supply would be 45,000,000,000 coins.
So, 45,000,000,000 (Circulating Supply) divided by $17,884,026,570 (Market Cap) = $0.25 cents.
In this scenario, if Max Supply was suddenly added into the market, Cardano’s Price would then be worth $0.25 cents per coin.
Keep in mind, none of this means Cardano’s price is going to go down to $0.25 cents. After all, no smart company would suddenly dump the max amount of coins into circulation without advanced warning. If and when they do, it will be up to the market to decide where the price will go. But it’s important to note, you will get a much clearer picture of a coin’s True Value by taking Circulating, Total, and Max Supplies into consideration.
Looking at coin prices alone can lead investors down a dangerous path wrapped up in risky and ill-advised decisions. Instead, focus on market capitalization and other underlying fundamentals for an honest depiction of a company or of its True Value.
Thanks Ron! Awesome read. Love the attention to detail in this. So much value.