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Molly White

To understand crypto “valuations”, take the example of MollyCoin. If I conjure a billion MOLLY tokens out of thin air and sell one for $1, I’ve just created a “billion dollar” cryptocurrency.

The price of a cryptocurrency is, as with most things, whatever someone else is willing to pay for it. 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. Most cryptocurrency trades don’t involve dollars on the other end, but rather other cryptocurrencies like bitcoin or ETH or Solana. A much more likely scenario than the one I just described is that I convince someone to give me .0003 ETH (around $1 at the time of writing) for my one $MOLLY token, and voila: $1 billion market cap (because market caps are almost always displayed in dollars) despite $MOLLY never having been traded against the dollar.
Now, imagine I created exactly the same number of $MOLLY tokens as there are ETH tokens. If I can convince someone to give me 1 ETH for 1 MOLLY, now MollyCoin has the same market cap as Ethereum (around $406 billion at the time of writing). Even if we assume that there is actually $406 billion worth of real, fiat currency floating around in the system to form the reported Ethereum market cap, we now have two tokens each ostensibly worth $406 billion, with no additional fiat being introduced. Each dollar that is backing some amount of ETH is also “backing” MollyCoin — it’s being counted twice. It should be clear in this contrived example that there is no way people could actually cash out all MOLLY and ETH tokens and somehow wind up with $812 billion in fiat. Crypto is not a magic money machine that creates real dollars out of thin air. Now, what happens if I convince someone to buy my highly illiquid crypto token with some other highly illiquid crypto token? MollyCoin’s dollar-denominated market cap is now not only arbitrarily based on however many of those tokens I could convince someone to give me for one MOLLY, but it’s also now based in the arbitrary dollar-denominated “value” of that token as well. And so on.
Now extrapolate all this that to the actual cryptocurrencies that exist today — how much actual value exists in the system, and how much is just double, triple, or n-times counting the same dollars? Of course, MollyCoin’s “total value” is all fake, and chances are probably quite low that I could find some sucker to buy the remaining 999,999,999 MOLLY from me for dollars (or ETH or anything else). But the press can still write that I’m an overnight billionaire, or that MollyCoin has a market cap of $1 billion. Furthermore, if I can convince CoinMarketCap to include MollyCoin alongside the million (and counting) cryptocurrencies they track, the total market cap of crypto shown on that site will have miraculously increased by $1 billion just like that.
#crypto#cryptocurrency
Jan 20, 2025, 02:44 PM·Public·Web
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