Many people consider market cap as a crucial (sometimes even the only) reference indicator when selecting projects (tokens). Recently, someone asked an interesting question: After seeing news about Trump being shot, they wanted to buy some TRUMP tokens. However, they found that the token’s market cap is already $350 million. If TRUMP’s price were to double, wouldn’t it require another $350 million, which seems difficult to achieve?
From a simple mathematical perspective, this may seem true. However, this question overlooks a critical factor: market liquidity.
When selecting projects, market cap is indeed an important reference indicator. However, ignoring the underlying logic of liquidity can lead to a one-sided view. So, how should we understand market liquidity?
According to Wikipedia, market liquidity is a market’s characteristic, allowing individuals or companies to quickly buy or sell an asset without causing a drastic change in the asset’s price. Liquidity involves a trade-off between the price at which an asset is sold and the speed of its sale. In a relatively liquid market, assets can be sold quickly without accepting a significantly lower price. In a relatively illiquid market, an asset must be sold at a discount to sell quickly.
In the context of the crypto market, we can summarize market liquidity as the ability to quickly exchange (trade) cryptocurrency at the current market price without significant value loss.
This concept isn’t difficult to grasp. For those who enjoy trading MemeCoins, they often encounter tokens with seemingly large market caps but almost zero liquidity. Therefore, while paying attention to market cap, we also need to consider the corresponding liquidity data. As shown in the chart below, sufficient liquidity is crucial, and the quantity of tokens you trade should not exceed the available liquidity.
For tokens on DEXs, different pools (trading pairs) pages often provide data such as Liquidity. For tokens on CEXs, we should focus on three key indicators: 24-hour trading volume, order depth, and bid-ask spread (the difference between the selling price and the buying price). Of course, due to factors such as limit stop-loss orders and iceberg orders, the order book on exchanges may not represent the most accurate price for the corresponding token, but these indicators still have some reference value.
Let’s take the MAGA (TRUMP) token as an example. At the time of writing this article, the token price is $8.11, and the TRUMP - WETH liquidity pool on Uniswap is $9.1 million, with a market cap of $354 million, as shown in the figure below.
In other words, as long as an additional $4.55 million is injected into the liquidity pool to buy TRUMP, the price of TRUMP should double, rather than requiring an injection of $354 million.
This involves an economic relationship between liquidity and asset pricing. Simply put, when the supply of an asset is fixed, demand becomes the decisive factor for pricing. When supply is elastic and demand increases, prices remain stable while the quantity demanded rises. However, when supply is inelastic (i.e., supply is fixed) and demand increases, prices will rise and find a new equilibrium.
Referring to the diagram above, with supply (S) held steady, if demand increases from DD to D1D1, the price will reach a new equilibrium point, moving from E to E1.
Similarly, the total market cap of the crypto market (excluding USDT and USDC) is $2 trillion, as shown in the figure. While many people are hoping that a Federal Reserve rate cut will bring substantial liquidity to the market, it does not mean we need an additional $2 trillion in new funds to double the market cap. In fact, with a certain amount of new liquidity and a new round of demand-driven speculation, it is entirely possible to drive up the overall market cap of cryptocurrencies.
In summary, when selecting projects, you should not focus solely on market cap but take a comprehensive approach. If you have the time and resources, it is advisable to use the project research template previously provided to assist you.
If you lack time and resources, you can simplify the project research process with the following steps:
Step 1: Choose a narrativeUsing the data categorization from the Dropstab platform as an example, the crypto space can currently be divided into hundreds of narratives, as shown in the figure below.
In the previous article by Huali Huanwai (July 14), we mentioned that because everyone’s time and resources are limited, it’s not feasible to conduct investment research on all narratives in the current crypto space. Instead, you should focus on 1-3 narratives that you find most promising for in-depth research.
Step 2: Filter projectsHere, you can continue to use the Dropstab tool. Utilize the tool’s filters to sort projects by different dimensions, then select a list of projects you wish to further explore or research, as shown in the figure below.
Step 3: Check projectsHere, we will continue to focus on several aspects of the corresponding projects, including:
1) Funding status of the projectIf a project has already received investment from some VC firms, it generally means the project is relatively lower in risk, at least in terms of potential fraud. While we’re not discussing price here, the risk of the project team conducting a rug pull is lower.
If you’re not familiar with the current VC involvement in the crypto space, you can use the DeFiLlama tool to help you understand this. As shown in the figure below.
2) Project’s community statusA project that is set to develop well needs to be driven by a strong community. You can join their community and learn more about them. If the project’s developers can engage in good discussions and communication with community users, actively update the community on project developments, and if the community (fans) is steadily growing, these are positive signs.
Project communities typically include the project’s Twitter (X), Telegram, or Discord. You can find these links directly through the project’s official channels, usually displayed at the top or bottom of their website.
3) Chart data of the projectIn addition to basic information, it is essential to also pay attention to the K-line chart of the project token. Some basic knowledge about K-lines was covered in the article by Huali Huanwai on July 3rd, titled “Technical Analysis Basics You Need to Understand Before Making Money.” Therefore, it won’t be repeated here.
4) The project’s token economyIn the crypto space, token economics is a very important concept. Trading without understanding the token’s economic design is like trading blindly and could lead to significant losses.
Token economics mainly includes several aspects, such as Market Cap, FDV (Fully Diluted Value), Circulating Supply, and Total Supply. These factors also involve token distribution ratios and unlocking schedules. Understanding these indicators will help evaluate a token’s potential and understand how the project operates and its potential impact on the token’s price.
After completing the three simple steps above, we should now have a list of potential projects. The next step is to implement a strategy for “buying the dip.” The topic of buying the dip has been covered in previous articles by Huali Huanwai, so it won’t be repeated here. As shown in the figure below.
Finally, it’s about patience and following your plan (take profits/cut losses). Of course, it’s worth reiterating that if you don’t consider yourself a professional trader, it’s advisable to minimize swing trading. For projects (tokens) with potential and value, holding them for six months or even a year can be quite normal.
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