As I have been tracking EOS and their ongoing Initial Coin Offering, I see on their tracking page http://eosscan.io/ that they post their ICO Token Market Cap at any given time. Here is a picture of today’s number.
The question I have to ask is what does market cap mean when it comes to the blockchain based companies and does it truly represent what market-cap does in general?
What Does Market Capitalization Mean?
Let us first look at the definition of Market Cap (market Capitalization from Wikipedia.
“Market capitalization (market cap) is the market value at a point in time of the shares outstanding of a publicly traded company, being equal to the share price at that point of time times the number of shares outstanding. As the outstanding stock is bought and sold in public markets, capitalization could be used as an indicator of public opinion of a company’s net worth and is a determining factor in some forms of stock valuation.”
So, it is clear that the conventional definition of market-cap is the sum of all outstanding shares of a given publicly traded stock multiplied by the price stated on the applicable exchange. There are two phrases in this definition that catch my attention: publicly traded companies and the number of shares outstanding.
The question then arises, do blockchain based tokens fit these two criteria?
ICO Token Market Cap – Does the term Apply to Tokens or Not?
There has been a lot of discussions lately as to the nature of these blockchain based tokens and how they should be categorized. We have seen in recent weeks that the SEC made a ruling regarding the DAO token and how it classified as a security. The Monetary Authority of Singapore followed with its own discussion regarding the structure of the blockchain based tokens and their classification. Let us differentiate between two types of tokens, “investment tokens” and “utility tokens”.
The DAO was ruled as a security because it was set up as an investment token in that DAO promised returns to their token holders in the future based on the number of tokens they held. Under the Howey Rule, they definitely classified as a security and would then have to be registered with the SEC and follow its guidelines. I have written previously on this and will post the link below. You can, therefore, argue that there is a true market-cap related to this kind of token as the price of the token on exchanges represent what the investors think the value of the company is. That being said, as these companies are not registering with the SEC, they have many issues related to their structure.
The vast majority of ICO initiated blockchain based tokens, however, are what we will call “utility tokens”. They are sold to the contributors with the idea that they will have access to the blockchain based companies project through the use of the tokens they hold. These tokens may also be traded on exchanges but the price “should” represent what the purchaser feels the value of the future use of the token is. Remember, that for these utility tokens, the holder has no equity in the company, just the ability to use the resulting platform with the tokens received.
Given my explanation of utility tokens, does the sum of the value of all tokens truly represent the market-cap, or value of the company? Is the company “worth” that amount? To me, it would seem not. The speculation on the exchanges may be happening as people are speculating on the value of the company, but in my estimation, they are not understanding what the token represents. Let me explain what I mean. Just as an example, let’s take EOS as an example. I am not choosing EOS for any particular reason, only because that is the example I used before.
During the ongoing EOS ICO, we have seen token being bought for amounts between less than a dollar to more than two dollars on a given day. Today, according to the exchange Bitfinex, the EOS token is worth $1.7899. Let us assume that EOS finishes their project in three years time and the price of the “utility token” is $25.00. This is quite a return for token holders. But does this represent the cost in real terms to utilize the platform? Will the token value drop significantly? That is to be seen. I don’t think that I have answered the question clearly at all, but it does leave something to think about.
ICO Token Market Cap – What is the True Market Cap?
Let us now look at this from a different angle. The second part of the definition from Wikipedia above was: “share price at that point of time times the number of shares outstanding”. This is where it gets interesting to me. Many ICOs issue only a portion of the tokens to the public and hold some of the tokens themselves.
The question is, is the market cap of the company, the market price of the market at any given time multiplied by the total token created or total token issued to token holders? We will continue with EOS, but this applies to other blockchain based companies as well. The figure above of the market-cap of EOS that they state on http://eosscan.io/ is the value of the total token to be issued multiplied by the current market price. This does not seem to fit the definition from Wikipedia. Shouldn’t the market-cap be the value of the tokens already outstanding as per Wikipedias definition? Let me show you what I mean with a couple of pictures from https://coinmarketcap.com/assets/.
The one on the top calculates market-cap based on total supply like EOS has valued their market-cap and the one on the bottom calculates by circulating (or outstanding) supply like Wikipedia defines market-cap.
ICO Token Market Cap – Conclusion
I think it is still unclear as to what ICO Token Market Cap means and represents. That being said, with the information given in the last section and the way that companies like EOS define their market cap seem not to match the true definition and should be stated as the value of the number of tokens issued multiplied by the tokens outstanding or circulating supply as https://coinmarketcap.com/assets/ calls it. What do you think?