Analyzing a Crypto Token: A Beginner's Guide

Price Doesn't Matter: A Cautionary Tale

I regularly overhear people chatting about investing in the Crypto space.

I simply feel that it would be beneficial for those without much experience to put the right foot forward first, so as not to have to stumble through the wilderness trying to find their path.

Token Price Doesn’t Matter

Yes, you heard/read that right. Now let me explain what I mean. The purpose of investing is to achieve the highest possible return commensurate with your risk tolerance. I don’t think that there is anything controversial about that. Then again, it’s 2023 so you never know...

Here’s something that definitely isn’t controversial SPEAK TO YOUR QUALIFIED FINANCIAL ADVISOR BEFORE MAKING ANY INVESTMENT DECISIONS

The world of Crypto is a highly volatile place - even for the biggest coins/tokens in the space. The granddaddy of cryptocurrency, Bitcoin $BTC, went from nearly $69,000 to less than $16,000 in roughly a year (Nov ‘21-Nov-’22). If that isn’t an abject lesson in volatility then I don’t know what is.

The potential upside you get from investing in this space is the price you pay (figuratively and often literally) for the amount of volatility. High Risk. High Upside. High Downside. Many people have been wiped out by making poor investment decisions.

Hopefully, that’s enough of a disclaimer. If not here’s a final one. Don’t invest any amount you aren’t prepared to lose.

Ok, Now Let’s Get Started

As I mentioned, the impetus for this post is that I often overhear people talking about the price of a given token. In my opinion, that’s not the best place to start. Once you’ve identified a potential investment, the first metric that you want to look at is the organization’s Market Capitalization. Market Cap is a simple concept - it’s the amount of money that it would take to purchase all of the outstanding tokens of an asset at any given time.

Here’s another definition from Investopedia. Note that Share(s) are interchangeable with “Tokens” or “Coins” or “Units” in the above formula.

As we can see by looking at Bitcoin, per CoinMarketCap.com (“CMC”), there are over 19 million Coins Outstanding/Circulating in the market as of the time of this writing.

The Market Cap is almost $402 Billion USD, which makes the Price Per Unit (PPU)

$401,835,695,555 Market Cap / 19,263,437 Circulating Supply = $20,860.02 PPU

You’ll also notice that the figures above are based on the Circulating Supply per CMC - which CMC also refers to as TOTAL SUPPLY.

Another important Metric to look for is the Fully Diluted Market Cap. The variable that changes in this instance, using the CMC terminology, is the Supply, wherein the MAX SUPPLY would be used instead of the TOTAL SUPPLY. The MAX SUPPLY refers to the Maximum Amount of Units that will EVER be available.

You want to make sure you fully understand the MAX amount, due to the fact that with some Tokens & Coins, there may be a significant disbursement in the future which could affect the future price per unit, especially if there is a non-insignificant percentage of outstanding shares owned by investors who have not priced in said disbursements and sell on reflex.

So Why Does Price Not Matter?

Price doesn’t matter in this context because Price is simply a function of the Market Cap and the Outstanding Supply (Shares, Tokens, Coins, etc). Now, you could rightly say that Market Cap is a function of the Outstanding Supply and Price, but the common variable is the Outstanding Shares.

Here’s why that’s important….

Unlike any publicly traded stocks that I’m aware of, Crypto Shares/Tokens/Coins/Units can number in the Trillions or Quadrillions.

Why does this matter?

1. On a percentage return basis, an asset with more outstanding shares can potentially far outperform the return of an asset with fewer outstanding shares. That is just a mathematical fact and if you’ve been in the space for more than 15 minutes you’ve heard stories where a token had outrageous returns. HOWEVER, trying to replicate that performance is also a FOMO-inducing pipe dream. Thus, the second part of the impetus behind this post is to caution the CrypWalk Crew against chasing returns - particularly from Tokens that have already had a massive run-up. If a Coin or Token has a multi-thousand percent run-up (such as Bitcoin and a few other Tokens have had over the last decade) do NOT expect that to continue. That is why I say price doesn’t matter.

Assuming that the Token has a 10 Trillion Unit MAX SUPPLY, that means the Token would have gone from a $1,000,000 Market Cap to a $100,000,000 Market Cap. There are less than 200 Coins/Tokens that have reached that Market Cap in the 13+ years of the Crypto Market.

Furthermore, for that Coin/Token to achieve another 10,000% return, it would have to eclipse a $10 Billion Market Cap. As of the time of this writing, there are only NINE (9) Coins/Tokens that sit above that Market Cap.

Look, I believe in the future of Crypto as an asset class. The purpose of this article is not to say you can’t achieve great returns in ANY particular investment vehicle. My only intention is to help temper your expectations, PARTICULARLY with Coins/Tokens that have already achieved massive run-ups.

A lot of readers are going to respond with, a “DUH BOB”. Fair Enough. But I’m not being hyperbolic when I say I’ve seen it dozens of times.

Knowing the Market Cap isn’t just important so that you can understand the historical performance of a Coin/Token but so you can compare it to Coins/Tokens that fall within the same Crypto Category.

For example, is it a Layer 1 Blockchain, Decentralized Exchange, GameFi, etc? How big are the largest Market Cap Coins/Tokens in that business category? What do the big players in the category have that the Token you’re analyzing doesn't? Work with your Financial Advisor and see if you come to a similar investment thesis. Most of all, realize investing, like Life, is a Marathon, not a Sprint.

Be responsible, walk before you run, have fun, and Never stop learning.

*FOMO = Fear of Missing Out

Also published here.