What determines the market value of encryption assets?

In the Crypto Assets field, the most common way to assess the scale of a project is to look at its market capitalization. The calculation method for this indicator is very simple: multiply the current trading price by the total amount of Tokens in circulation. The formula is: current price × Circulating Supply = market capitalization.

For example: if the trading price of a certain Token is 10 dollars and the Circulating Supply reaches 50 million coins, then the market capitalization of this project would be 500 million dollars. It seems very intuitive, but there is an important trap here.

The Truth Behind Market Capitalization Numbers

Many people confuse market capitalization with the actual amount of funds flowing into the market, which is a common misconception. Market capitalization and real investment amount are not the same concept—an increase in market capitalization does not equal a large amount of funds pouring in.

Imagine if, with just a few million dollars, the price of a Token could be pushed from $10 to $15, causing the project's market capitalization to swell from $500 million to $750 million. However, this increased $250 million market capitalization does not represent an actual addition of $250 million in funds to the market. The actual investment is far less than this figure.

Liquidity and trading volume are key

The real factors influencing price movements depend on two interconnected but often confused variables: trading volume and liquidity.

Trading volume reflects how many assets are being traded within a specific time period. Liquidity, on the other hand, measures how quickly an asset can be bought or sold, while also assessing the impact on price.

In a market with ample liquidity and high trading volume, the order book will be filled with orders at different price levels. In such a market environment, even large transactions find it difficult to significantly impact price fluctuations. Whale-level traders wanting to manipulate this type of market need to invest a substantial amount to move the price.

On the contrary, a market with a sparse order book and low trading volume becomes a paradise for manipulators. Even a relatively small amount of capital can cause a surge in volatility, leading to drastic fluctuations in market capitalization. The market capitalization of such markets is easily manipulated, and although the numbers may appear large, their stability is concerning.

So, when evaluating a crypto project, don't just focus on the market capitalization number; liquidity and trading volume are often better indicators of the market's true health.