How to Value Cryptocurrency

Molly White educates us again on how to think about cryptocurrency valuations, writing in her latest Citation Needed newsletter that, No, Trump didn’t make $50 billion from his memecoin

When someone tells you that a pile of crypto tokens are “worth” X dollars,b what does that mean?

Here’s the essence of the calculation:

To get the dollar value of a pile of crypto tokens, we take the price of that cryptocurrency on an exchange and multiply it by the quantity of tokens in the pile. To get the market cap, we take the price of that cryptocurrency and multiply it by the total number of tokens in circulation. To get the “fully diluted valuation” we take the price of that cryptocurrency and multiply it by the maximum possible number of tokens planned to ever exist for that cryptocurrency.

And the risks for new coins:

But how is price determined for brand new coins? If I decide to hop on the crypto bandwagon and create MollyCoin, and I write some code to create a billion $MOLLY tokens out of thin air, how much are they worth? In reality, approximately $0 — I’ve put no real money into the system, and they don’t represent any good or service that might be considered valuable. But if I can convince someone to buy one $MOLLY token from me for $1 on one of the many exchanges that will allow you to exchange any token under the sun, suddenly we have a price! And even though only one token has ever traded hands, because market cap is calculated by taking the price per token on an exchange and multiplying it by the number of tokens circulating,e MollyCoin now has a “market cap” of $1 billion.

Her article goes into much more detail on liquidity and other issues.