2017 was an incredible year for cryptocurrencies, with the market cap expanding from just $17 billion at the beginning of the year to around $565 billion by the end of December, representing growth of around 3223%. However, contrary to the belief of some new to investing concepts, this does not mean that there is now $565 billion worth of fiat invested in the crypto markets.
To understand why, we need to first understand what market capitalization actually means. The market cap of any stock, asset or cryptocurrency is calculated with the following formula: total supply x price. Therefore, it is not a representation of actual money invested, but rather a function of market price that provides a theoretical valuation of the asset in question.
This mechanism has a couple of implications. Firstly, it means the market cap can increase without any additional money being invested because any increase in price driven by demand will lead to a subsequent rise in market cap. Secondly, increases in supply can also lead to market cap growth if the extra supply does not depress prices. Thirdly, as the market cap is calculated by averaging the price of different cryptos across hundreds of exchanges, any fiat inflows that occur through non-public channels will not be recorded.
So How Much Fiat is Actually Invested in the Cryptocurrency Markets?
The very nature of cryptocurrencies make this a hard question to answer accurately. Whilst a good proportion of transactions are registered by websites like CoinMarketCap, who are also the go too for checking the crypto market cap, there are also lots of over-the-counter decentralized trading options that may not be registered. Additionally, wash trading has also been identified within the markets, but it is virtually impossible to distinguish from real liquidity.
Regardless, a couple of financial institutions have published reports estimating the total inflows of fiat into the cryptocurrency markets. The results are quite staggering, with Citi estimating inflows of less than $10 billion during 2017 and JP Morgan suggesting inflows of just $6 billion between 2009 and when the market cap first reached $330 billion. Both of which indicate that fiat invested is only equivalent to around 1.8% of the total market cap.
Whether you think these reports are reliable or not is another question. On one hand, JP Morgan have actively slandered cryptocurrencies for some time now, whilst Financial Times writer Robin Wigglesworth said ‘I wouldn’t feel entirely comfortable using this number’ in relation to the Citi figure. Whatever your take, even if the total fiat invested was 5x greater than the 1.8% figure it would still be less than 10%.
To add a bit of perspective, it is worth taking a look at total global inflows of fiat into different asset classes. Over 2017 the net total inflows into the equities markets were around $283 billion, whilst $345 billion entered the bond markets. If only a tiny portion of these inflows were diverted into the crypto markets in 2018, the market cap could climb significantly. As more and more financial instruments are constructed around Bitcoin and other crypto currencies, this is seemingly more likely.