Why I think coinmarketcap is misleading, and why people should look deeper into the coin data

I want to take a look at the top ten, and show how misleading coinmarketcap can be (depending on your perspective). But first, a quick primer on some of the terms I'll be referring to:

Market Cap is the total market value of a security (1). Typically when you talk about market cap, you're talking about shares, so let's use that for simplicity. To calculate market cap, you multiply a company's shares outstanding (2) by the current market price of one share. Pretty simple.

Where it gets complicated is applying it to the crypto world. Normally, you'd simply multiple the number of coins by the market price, however, as a number of cryptocurrencies have coins yet to be minted, yet to be distributed, or 'locked up' in various places, you can calculate market cap in different ways.

So here's my issue with coinmarketcap, rather than calculating using traditional methods, coinmarketcap uses the free float method (3) for market cap calculation (4). Free float is a term to describe the circulating supply of a security (in our case,i t's circulating coins).

The big problem with this is that free float is often drastically different from the outstanding total, leading to drastically different results for the market capitalisation calculation. To illustrate this, let me give a quick top ten by market cap using both methods:

Here we have the regular top ten seen on coinmarketcap using free float methodology:

Here we have the same top ten calculated using total supply (i.e. traditional market cap):

Notice the big differences in values, and the shifted order of the top ten.

If at this point, you're thinking, "Meh, no big deal really", well, wait until you get to the smaller volume, less traded coins. Here's a top 7 crazy coins table I've put together:

That's right, that's something called BITOK worth apparently $109 billion dollars. That's double the valuation of bitcoin. What is BITOK? It's a scrypt POS coin that's only traded on YoBit exchange with a 62BTC 24 hour trade volume. Probably something that 99.9% of the community have never heard of, but apparently, it's worth almost the same as either Comcast, British American Tobacco, or Boeing!?

What's caused this crazy valuation? A lack of understanding of the value of the cryptocurrency, a detachment from the data, and an ignorance of how pricing would normally work. Whilst coinmarketcap isn't to blame for BITOKs ridiculous valuation (they seem to have no given it a market cap because they haven't given it a circulating supply value), it does showcase just how disconnected from reality traders can get if they don't use and access information sufficiently.

Coinmarketcap do give their reasons for using free float methodology on their site (4), and, honestly, the answer isn't one way or the other. One way isn't the right way. It's a debatable issue.

The point, however, is that people are making irrational decisions based on quick glances at what is at best misleading information. It is unfortunately easy for whales to manipulate the market cap of small volume coins to ridiculous degrees (as shown above).

By all means, use coinmarketcap, it's a great website and I use it daily. To it's credit, it does contain all the information available if you click through, however, just be aware of what you're looking at and how those numbers are calculated.

(all figures in US dollars for simplicity)

Sources:

1: http://www.investopedia.com/terms/m/marketcapitalization.asp
2: http://www.investopedia.com/terms/o/outstandingshares.asp
3: http://www.investopedia.com/terms/f/freefloatmethodology.asp
4: http://coinmarketcap.com/faq/
5: https://www.reddit.com/r/ethereum/comments/5izcf5/lets_talk_about_the_projected_coin_supply_over/
6: https://www.reddit.com/r/Monero/comments/3z527f/does_monero_have_a_maximum_cap_like_bitcoin_21/