Why is there such a price difference between cryptos?

With bitcoin trading at over $20, eclipsing all cryptocurrencies, the Dogecoin (DOGE) for example is trading at a paltry price of 0.059 dollars. Some tokens trade at $30 while others cost around $2000. What do we owe this disparity to?

It would be wrong to determine whether a cryptocurrency is a good investment or not based solely on its price.

Read this article to know all the influencing factors.

Market cap and supply, two indicators that « correlate "determine" the prices

It is common sense to say that bitcoin is worth more than most cryptocurrencies. However, this was not always the case. Truth be told, one bitcoin cost around $65 in May 000, while the price of Yearn.Finance (YFI) was worth $2021. Yes, it went that high!

price difference with yearn finance — Source: https://coinmarketcap.com/currencies/yearn-finance/

Even if a YFI token was worth that much, bitcoin was still the most “valuable” cryptocurrency.

For a novice, a paltry price equal to a bargain. Some go so far as to think that the price of a cryptocurrency like Shiba Inu or dogecoin could reach that of bitcoin...To tell you frankly, it's almost impossible. This is illogical reasoning given that market capitalization as well as the supply side of the crypto are one of the elements that influence prices.

Read our article on market capitalization (market cap).

Market capitalization (Market Cap)

Market capitalization is a metric used to calculate the value of a cryptocurrency. In this calculation, we take into account the price of the crypto and the supply of tokens in circulation.

Since the price of a crypto varies according to supply and demand, the market capitalization is not invariable.

The site CoinMarketCap for example, ranks cryptocurrencies in descending order of market capitalization. Bitcoin is in the lead with a capitalization of $380 at the time of writing.

The price difference between cryptocurrencies can also be a type of ranking on sites to make its DYER, like CoinmarketCap or Coingecko, for example.

Circulating offer

Circulating supply is the number of tokens available in the market. Not to be confused withtotal supply also called total supply. The latter represents the number of parts that will be available in the long term.

To calculate the capitalization of bitcoin for example, you must multiply the price of BTC by 19 (the number of BTCs in circulation at the moment) and not by 21 million (the total existing bitcoins)The 21 million bitcoins are precisely the “total supply”.

Most often, cryptocurrencies having a high supply are trading at cheaper prices on the stock market.

For example, the circulating supply of Dogecoin (DOGE) is about 128,3 billion tokens, according to the figures of coinmarketcap. Given its supply, the market cap of DOGE would be approximately 128 trillion dollars if a token of DOGE was once worth $1 (USD) . This seems unachievable. In fact, right now the entire cryptocurrency market has a market capitalization of around 973 billion. That tells you how surprising that would be.

Supply and price

As a general rule, the fewer the number of tokens in circulation, the higher their price. Of course, other factors are taken into account. But, it is generally true that if there are a lot of tokens in circulation, the price of the crypto will be low compared to cryptos with a smaller supply. This is generally why investors tend to prefer so-called “deflationary” cryptos.

Read the article on deflationary cryptocurrencies

Additionally, in most cases, cryptocurrencies hold a maximum offer programmed in their code. The available supply of each asset can continually increase following various forms of blockchain network validation (mining or stacking for example) until reaching its maximum supply.

Prices may fluctuate when new coins are released into circulation. In reality, validators tend to sell their rewards in order to reimburse their operating/maintenance costs. mining devices.

Furthermore, there are other cases where tokens are continuously withdrawn from the market. In this case, the objective is to reduce the total supply of a given crypto asset. This is the famous Burning of tokens or burning of coins in French.

This model is used by Binance Coin (BNB), Shiba Inu or even Monday (recently, this has caused quite a stir). For Binance for example, the total supply of BNB is reduced every 3 months.

Indeed, the Binance company has committed to using 3% of its profits every 20 months to buy BNB tokens at the market price and then burn them until reaching a certain limit. This action has a positive impact because it creates a certain scarcity of the token and thus increases its price.

What is the market cap for?

For an investor, the market cap allows you to obtain information about the growth potential of a given cryptocurrency. As an example, the asset that has a large market capitalization could be considered more reliable compared to others.

In addition, an asset with a large capitalization is less volatile. Thus, it is said that the growth potential is lower but also that of "degrowth". It is then the equivalent of "blue chips" with regard to stocks on the stock market. Then, just like the Lindy effect, it is then less likely that crypto with a large market cap will fall or disappear.

THELindy effect is a theory that an idea or business (or whatever) is more likely to survive over time if it has been around for a long time. Indeed, "its longevity indicates resistance to change, obsolescence or competition."

This is why some traders flock to cryptos with low market capitalizations for their high volatility. It is also with small market caps that we can achieve greater returns on investment.

Although it is not the only indicator, market capitalization also allows us to measure health and validation within the ecosystem. It is used for and even dominance of a cryptocurrency on the market.

While in May 2021, the total capitalization of cryptocurrencies approached $3000 billion, today it is down by more than 70%. For many, this is an opportunity to buy at a low price.

Read the additional article: How important is the FDV (Fully Diluted Valuation) indicator to consider?

Conclusion on the price difference between cryptocurrencies

It has already been said that market capitalization is one of the crucial pieces of information to fully understand the price differences between cryptocurrencies.

Speculators can use it to research and learn about the cryptocurrency they want to buy. This is how we make a fundamental analysis worthy of the name, far from shillings and marketing attempts to influence you.

However, some cryptocurrencies can be overvalued and mislead investors. This is why market capitalization is by far the only metric to consider. For invest in cryptocurrencies, it is crucial to read the tokenomics as a whole.

Adoption, use case, economic potential,'social engagement and the associated risks must also be considered. It is therefore essential to carry out in-depth market research before making any decision. This includes reading the project white paper, among others.

Bitcoin has already proven itself since and today he is celebrating his 14th birthday… The fact that its market valuation represents 40% of the entire market in no way demonstrates the opposite.

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Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.

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