CoinMarketCap: The Go-To Portal for Cryptocurrency Data Needs
If you are a crypto enthusiast, investor, or a trader, you’ve probably already used the CoinMarketCap.com. The website allows you to track the price, volume, and market capitalization statistics of various cryptocurrencies. This CoinMarketCap LLC product maintains a database of historical price/volume data of all trading crypto-assets. The website has, thus, steadily become the go-to portal for all cryptocurrency data needs.
Analysts also make use of CoinMarketCap data to draw inferences and draft forecast reports on various cryptocurrencies. This makes it imperative that the data, especially price data quoted on the website, is unbiased and error-free. A thorough understanding of the math behind calculated data points is a definite must-have. From the website, we know that market capitalization is calculated by multiplying the price by the total supply. The price quoted on CoinMarketCap is calculated by taking the volume weighted average of prices reported at each market.
How Is Bitcoin’s Price Calculated?
As investors, analysts or simple crypto enthusiasts we would all love to dig a little deeper to better understand what affects or could potentially affect the price of a cryptocurrency on CoinMarketCap. Look at the market data for Bitcoin (BTC) below, for instance, as on May 21, 5:50 AM UTC.
Here (image above), column ‘A‘ represents column ‘B‘s reading as a percentage of value ‘C’ i.e. the aggregate 24h volume of that particular cryptocurrency. So, column ‘A‘ multiplied by column ‘D‘ value gives us the price share that the particular exchange commands in the calculation. Add each individual price share together and you arrive at the final calculated price for the cryptocurrency. In the example above, the OKex exchange price quote (for the BTC/USDT trading pair) of $8,498.55, dominates the final price reflected on CoinMarketCap for Bitcoin ($8,513.81 above) to the extent of 3.53%.
In essence, the $8513.81 price calculated by CoinMarketCap for Bitcoin (BTC) is a weighted average of the price of Bitcoin at various exchanges. The weights assigned being in accordance with the trading volume it represents vis-a-vis the aggregate. A formula for the same would read something like:
Price (BTC) = (v1*p1) + (v2*p2) + (v3*p3) + (v4*p4) + (v5*p5)……….and so on.
Volume % of various exchanges (column A above) is represented by v1, v2, v3, v4, v5…….so on.
And, $ price at various exchanges (column D above) is represented by $p1, $p2, $p3, $p4, p5…..and so on.
So, in our instance (above):
8,513.81 = (0.353*8498.55) + (0.330*8499.66) + (.0261*8493.35) + (.0249*8509.40) + (.0235*8579.67)……………and so on.
2 Key Inferences
Now, this leads us to two inferences:
- The more the volume traded of a particular cryptocurrency on an exchange, the more dominance it will exert on the final price.
- The higher the current prices quoted on the dominant (high volume) exchanges, the higher the final price reflected on the website.
Hypothetically, let’s assume that exchange XYZ dominates a good 8-9% volume weight in the price calculations of cryptocurrency ABC. Now, some adverse news relating to XYZ exchange takes the price of ABC down by a good percent within a day. In this instance, we would see a proportional decline in the price quoted on CoinMarketCap as well.
Alternatively, if some pumping activity at the PQR exchange gave a boost to the price of cryptocurrency DEF, it would not affect the CoinMarketCap price much if PQR commanded a very low share of the overall trading volume of DEF.
Image Credit: Deposit Photos