RE: How ICOs inflate the cryptocurrency market cap
Hi @biophil! Thanks, its been a few weeks that I am around Steemit but I have not yet dared to write a post, so I'll start with a comment at least. I've been going through your posts and I am enjoying quite a lot the way you think.
For example I liked a previous post where you made a point I haven't read before about why, these days, there seems to be a bit more of economy behind cryptocurrency ecosystem because of the ICOs, which at least aim to add value to the system. Whereas in 2013-14 there were barely any ICO, so the majority of money flowing in was about speculation (nowadays it's still similar, but at least there is so many ideas that I bet some will be the next Amazon).
But in this post, I am not sure I've properly followed your reasoning. I understand that a new ICO creates new tokens, which are not really money as of now (although there are some ICO's whose idea is already quite implemented and profitable, so somehow you invest in a "real" asset/security and not just in a promising future, i.e. FriendZ -highly recommended btw). But that's slightly different from:
Alice paid 1 ETH for it, so we know it's worth.... yep, 1 ETH
Actually since Alice paid 1 ETH, now it's actually worth nothing (well, the token). It's virtually the same as if she just used USD to buy the ETH and then the ETH to buy the token. So yes we have incorporated extra USD to the crypto market cap, but ETH supply has not changed.
Am I right? I am quite new in the crypto space so sorry in advance if I am wrong.
Thanks again!
Hi, glad you're finding my stuff useful!
My reasoning is that the act of paying 1 ETH is what makes the token valuable. I mean "valuable" here in the sense of "having a market value." The market value of something is the only thing that impacts its market cap, and understanding the massive market caps of cryptocurrencies was the main goal of my article.
Correct, but the new ICO token that Alice bought now exists, whereas before she bought it it didn't exist. So the market cap of ETH is still exactly the same, but the market cap of whatever this ICO token is has grown.
I wonder if you're mixing up different notions of value. The ICO token that Alice bought might be for a crappy project, but the token can obviously have a market value that's independent of the project's value. We see this in Ponzi schemes like the old Bitconnect. The project was vapor (and this was known by a lot of people), but the token had a huge market cap.
Clear anything up?
Yes! I guess it was about semantics. As you said, new tokens inflate the market cap, totally agree. I guess my point was more towards the fact that this inflation is the same that happens with the actual mining of one BTC for example; or even less, since at least some of these new tokens will actually end up having a utility.