It was a US$2 trillion wipeout, or so they say. The still-unfolding crypto winter, which leveled an entire blockchain’s ecosystem, a large hedge fund, a couple of crypto lenders, and an untold number of retail investors, sent crypto’s total market capitalization plummeting to about US$1 trillion, from roughly US$3 trillion at its peak in November.

Seeing that number made me wonder if market cap—which is just the number of tokens multiplied by each one’s latest price—is a good way to measure the overall size of the industry. Also, given that a vast number of coins have simply vanished and that plenty of projects produced worthless tokens, does market cap really tell us anything about crypto’s economic value?

Central to the market-cap conundrum is that some users sell crypto assets to themselves over and over—this is called “wash trading”—creating the illusion that money changes hands and items are worth more than they actually are. Melania Trump made news earlier this year when it was reported that the winning bid for her first nonfungible token, or NFT, a photo of her wearing a white suit during a 2018 state visit to France, appeared to have come from the former first lady’s own crypto wallet.

So how much of that US$3 trillion pile at the height of crypto last year was actually … cash? Could it be that the last crypto boom never even happened? The question of just how big the ecosystem became matters for a number of reasons, not least of which is that a ton of retail investors plunged into crypto thinking it must be safe, since so many others had made money doing so.

It looks a lot less safe now. The popular crypto platform Coinbase Global Inc. is under investigation by the US Securities and Exchange Commission for offering tokens the regulator deems unregistered securities. The company has also announced layoffs, as have BlockFi,, and Gemini Trust, among others. Many unanswered questions remain in the bankruptcies of Celsius Network LLC, a crypto lending platform, and Voyager Digital Ltd., a crypto brokerage. And it’s all happening as Bitcoin, the largest cryptocurrency, hovers around US$21,500, down from almost US$69,000 in November. Where did all that money go?

I decided to go down the rabbit hole. The first stop was figuring out how many real people had entered the cryptosphere. A Federal Reserve survey says that 12 per cent of US adults held crypto in 2021. A Pew Research Center poll conducted in September 2021 put the figure slightly higher, finding that about 16 per cent of Americans had invested in, traded, or somehow used digital assets. That’s something like 53 million people—not insignificant.

Money definitely flowed toward digital assets during their high-profile ascent in the pandemic years. The website CoinMarketCap shows that daily trading volume peaked at about US$455 billion in February 2021 across different crypto exchanges, and it’s hovering at around US$70 billion today. It’s not like the whole thing is made of hot air.

Embedded Image
Illustration: Arne Bellstorf


Yet hot air was the central theme of my conversation with David Gerard, a noted crypto skeptic who’s written with Amy Castor about the popping of the crypto bubble. He has strong opinions about that US$3 trillion market-cap figure. “It’s literally just made-up BS numbers,” he says, right off the bat. “They’re all just lies, marketing for crypto. Big numbers make headlines.”

The trouble, he says, is the system ran out of new investors. It’s not a Ponzi scheme, but it works like one, because early investors can only be paid with money from later investors. And because the dollar size of the market and the number of participants are both tiny, he adds, it’s easier to manipulate—and there’s lots of manipulation going on.

Gerard says many Bitcoin miners stockpiled freshly mined tokens last year. They might not have been able to offload their piles of coins even if they wanted to, he says, because the market is so illiquid: “It’s smaller than you think.”

For truer, more granular data on crypto’s size, Gerard suggests looking at flows of cash into and out of exchanges. But that would require accessing data from exchanges—and most don’t willingly share it. Gerard says totaling all the leverage involved in trading crypto would give a sense of how much the underlying market is inflated by. Store away that thought for now.

Embedded Image
Illustration: Arne Bellstorf


If you want more concrete figures, a 2021 paper by the Federal Reserve Bank of Cleveland looks like it may hold some clues. Two economists looked into how retail investors spent their stimulus checks on crypto. “It’s much more difficult to quantify the market value as accurately as you would for stocks or bonds,” says one of the authors, Anantha Divakaruni, who teaches financial technology at the University of Bergen in Norway. “Buyer and seller information is highly unavailable.”

Divakaruni’s co-author, Peter Zimmerman, a Cleveland Fed economist, suggests looking at measures that show the average price at which Bitcoin has traded, not the price at which the last coin was sold. (He won’t be the only one to recommend this.) Zimmerman notes that average price is a good measure for markets that can be as illiquid as crypto often is.

Embedded Image
Illustration: Arne Bellstorf


I also consulted Noelle Acheson, head of market insights at crypto lender Genesis Global Trading Inc. Acheson, who has a degree in applied mathematics and economics from Brown, says she thinks market cap might actually be a decent way of measuring the value of crypto.

About 90 per cent of the figure reflects the top 20 coins by market cap, she explains. Certain gauges even exclude dormant coins, or tokens that haven’t been touched in more than five years and are presumed lost. “So I would say market cap is an interesting way to look at the value of the crypto ecosystem, because of what the tokens themselves represent,” she says. “Speculation is in there, and you can argue that speculation is” one of crypto’s legitimate uses.

Another way of looking at it, Acheson says, is to compare the “free-float supply” measure using figures provided by Coin Metrics, a company that tracks real-time crypto data, with circulating supply. Free float shows the number of coins in circulation but subtracts those held by foundations, the nonprofit groups dedicated to supporting blockchains, and dormant supply. The Coin Metrics numbers—which aren’t ideal, because they don’t include Solana and a few other major tokens—show the market cap based on the circulating supply of 8 of the top 10 tokens to be US$787 billion. And market cap based on free float is about 80 per cent of that current-supply market cap, or about US$630 billion. Now we’re getting somewhere.

The next researcher on my list is James Malcolm, head of foreign exchange and crypto research at UBS Investment Bank. He tells me to look at realized value—the prices that coins actually fetched in their most recent transaction—instead of market value, which assumes every coin would trade today at the current price shown on an exchange. “Because of deleveraging, prices have come down to more or less the average realized value price,” Malcolm says from his home outside London, mirroring Gerard’s point about leverage distorting the market-cap number. “So now there’s very little difference between market value and realized value”—meaning today’s market cap of about US$1 trillion is a pretty good read of how big the crypto market really is. That may sound like a lot, he adds, but “it’s particularly small” when compared with any other conventional market. Malcolm says a useful way of looking at the market is through what’s known as MVRV, or the ratio of market value to realized value. MVRV reveals how frothy the market is. And luckily there’s a researcher who tracks it.

Embedded Image
Illustration: Arne Bellstorf


James Check at Glassnode, a crypto data provider, is well-known among the eccentric bunch who live to peruse Bitcoin charts for all sorts of data on how the token is behaving or who’s winning and losing amid the downturn. A former civil engineer, Check is the man behind any number of esoteric measures, such as the “RVT ratio” and “MRGO” (don’t ask), that sometimes get mentioned in stories about crypto. To get a read on the number of people who participate in the ecosystem, Check tracks a measure called entities. A single person can use multiple addresses, so Glassnode clusters them together into entities—unique users—to get a more accurate reading. Bitcoin has about 300,000 unique entities per day, down from around 400,000 in February 2021, he says. As for the market’s value, he also tells me to look at MVRV, which reached 3.2 at November’s peak, meaning the market value was that many times larger than the realized value.

So if the market cap was almost US$3 trillion at the peak, dividing it by 3.2 equals about US$875 billion, which roughly approximates today’s US$1 trillion market cap. “It’s never going to be perfect, but it’s showing you the speculation premium over and above the real underlying value of crypto,” Check says.

Is US$875 billion a lot? “To an individual, US$875 billion is enormous, to a company it’s enormous,” Check says. “To an asset that has all the potential to usurp gold and probably overtake it by some orders of magnitude, it’s peanuts.”

Philip Gradwell, chief economist at Chainalysis Inc., a blockchain data platform, says there are two core ideas to consider. First, it’s possible to see when Bitcoin or any other crypto enters a wallet where tokens are stored. Second, it’s possible to see the price in the market when it does so. This gives us the realized value for every single crypto holder. He reckons about US$411 billion is what investors and businesses paid for the Bitcoin they currently hold, while the realized value of all cryptocurrencies is US$841 billion. Even though it pales next to Apple Inc.’s US$2.7 trillion market cap, “I don’t think it’s that small of a number,” Gradwell says. “In a way, it’s astonishing wealth creation—it’s a big transfer of wealth from people who created these assets to those who want to buy them.”

So, what have we learned? One big lesson is that market cap alone isn’t really a great measure of crypto’s economic value—and may even artificially inflate its overall size. While the market value has plunged from US$3 trillion to about US$1 trillion, the “true,” or realized, value of crypto has held steady in a narrow band. That’s because market cap reflects all the things that can amplify froth, such as leverage, wash trades, manipulation, dormant coins, and coins that never made it into circulation. Strip all that out, and crypto’s value has been remarkably steady through all the gyrations. What would push it higher? In a word, liquidity: more people investing in crypto as a store of value, rather than just trying to pump up the price of their favorite token.