Really interesting piece by Molly White on crypto "market cap"

No paywall.

https://blog.mollywhite.net/cryptocurrency-market-caps-and-notional-value/

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The price of a cryptocurrency is, as with most things, whatever someone else is willing to pay for it. But how is price determined for brand new coins? If I decide to hop on the crypto bandwagon and create MollyCoin, and I write some code to create a million MOLLY tokens out of thin air, how much are they worth? In reality, approximately $0 — I’ve put no real money into the system, and they don’t represent any good or service that might be considered valuable. But if I can convince someone to buy one MOLLY token from me for $1 on one of the many exchanges that will allow you to exchange any token under the sun, suddenly we have a price! And even though only one token has ever traded hands, because market cap is calculated by taking the price per token on an exchange and multiplying it by the number of tokens circulating,7 MollyCoin now has a market cap of $1 million.

Most cryptocurrency trades don’t involve dollars on the other end, but rather other cryptocurrencies like Bitcoin or Ether. A much more likely scenario than the one above is that I convince someone to give me .00074 ETH (around $1 at the time of writing) for my one MOLLY token, and voila: $1 million market cap (because market caps are almost always displayed in dollars3) despite MOLLY never having been traded against the dollar.

Now, imagine I created exactly the same number of MOLLY tokens as there are ETH tokens. If I can convince someone to give me 1 ETH for 1 MOLLY, now MollyCoin has the same market cap as Ethereum (around $165 billion at the time of writing). Even if we assume that there is actually $165 billion worth of real, fiat currency floating around in the system to form the reported Ethereum market cap, we now have two tokens each ostensibly worth $165 billion, with no additional fiat being introduced. Each dollar that is backing some amount of ETH is also “backing” MollyCoin — it’s being counted twice. It should be clear in this contrived example that there is no way people could actually cash out all MOLLY and ETH tokens and somehow wind up with $330 billion in fiat. Now extrapolate that to the actual cryptocurrencies that exist today—how much actual value exists in the system, and how much is just double, triple, or n-times counting the same dollars?

Now, what happens if I convince someone to buy my highly illiquid crypto token with some other highly illiquid crypto token? MollyCoin’s dollar-denominated market cap is now not only arbitrarily based on however many of those tokens I could convince someone to give me for one MOLLY, but it’s also now based in the arbitrary dollar-denominated “value” of that token as well. And so on.

Of course, MOLLY’s “total value” is all fake, and chances are probably quite low that I can find some sucker to buy the remaining 999,999 MOLLY from me for dollars (or ETH or anything else). But the press can still write that I’m an overnight millionaire, or that MollyCoin has a market cap of $1 million. Furthermore, if I can convince CoinMarketCap to include MollyCoin alongside the 20,249 (and counting) cryptocurrencies they track, the total market cap of crypto will have miraculously increased by $1 million just like that.

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