Does it shock you that it is technically attainable for a $1 buy of an asset to shoot the market cap up by a trillion {dollars}, or for a $100 billion buy to not transfer the value by a single penny? Many misunderstand the mechanism that truly drives worth actions. Let me clarify.

Intro

Lots of people appear to have misconceptions like pondering if x {dollars} circulation into an asset, its market cap will go up by x {dollars}. In truth, it’s not attainable to find out how a lot cash has been put in to an asset based mostly on its market cap, or conversely how a lot a market cap will transfer when some sum of money flows into or out of the asset.

Price is solely a perform of the present state of the order books throughout all markets that checklist the asset.

Consider this: let's say the present worth of BTC on Binance is 50k. What does that actually imply? It merely signifies that the very most cost-effective restrict promote order at present on their order books is for 50k. That's what worth means definitionally, proper? Price is simply the quantity it’s a must to pay to purchase one thing, so on a CEX worth is at all times merely the present most cost-effective restrict promote.

Example 1: Huge Purchase with No Effect on Market Cap

Let's say that the present worth of BTC on Binance is $50k, and the particular person at present keen to promote at 50k (and who’s thus the particular person at present defining the Binance worth of BTC) is a whale who’s providing 1000 BTC at 50k. Let's say I’m a whale purchaser and I’m put in a market order for 999 BTC. Well, I’ll find yourself shopping for all 999 from the whale vendor, leaving them with 1 BTC nonetheless on the market at 50k. Since they’re nonetheless promoting 1 BTC at 50k, the value of BTC on Binance remains to be 50k. So I simply purchased almost $50 million value of BTC however the worth (and subsequently the market cap) didn't transfer by even a penny.

Example 2: Tiny Purchase with Huge Impact on Market Cap

Now think about one other situation. The present worth of BTC on Binance is 50k, as a result of the present most cost-effective restrict promote is somebody promoting 0.01 BTC on the worth of 50k. Let's say I determine to purchase 0.02 BTC. Well, half of that may come from the particular person promoting 0.01 at 50k, which suggests I’ll devour that vendor. The worth of BTC on Binance will now teleport to regardless of the subsequent most cost-effective restrict order is for (that is the mechanism by which worth goes up when individuals purchase). Since BTC may be very excessive liquidity (which suggests numerous restrict orders on the books packed densely throughout the value spectrum), the subsequent most cost-effective restrict promote after the 0.01 BTC at 50k would most likely be at like 50.00001k. But, for the sake of the instance, let's think about a extra excessive situation during which BTC liquidity is extraordinarily low so the subsequent most cost-effective supply after the 0.01 at 50k is at 50.5k, totally 1% costlier. Ok, nicely, I find yourself getting 0.01 BTC at 50k, and one other 0.01 BTC at 50.5k, fulfilling my market order and leaving the value of BTC on Binance at 50.5k. So, I’ve spent about $1000, however I moved the value of BTC by 1%, which suggests my buy of $1000 elevated the BTC market cap by almost $10 billion.

Closing Thoughts

Now, I’ve been kind of glossing over the truth that for BTC and most cryptos, they’re listed on many unbiased order books without delay (one for every CEX), so an asset technically has as many alternative costs as markets that checklist it. So, in the event you prompted a -50% wick on Binance for a sizzling second on account of an especially illiquid market, you didn't truly lower BTC market cap in half for a second, you simply lower the market cap of Binance BTC in half for a second. Since there are dozens of markets that checklist BTC, there are dozens of various costs of BTC, and subsequently dozens of various partial market caps of BTC. "The" market cap of BTC is simply all of the completely different BTC market caps on all markets added up. In actuality, all of the issues I’ve described on this publish are occurring independently in each marketplace for one asset like BTC, after which the costs throughout these markets are saved in sync on account of arbitrage.

There are additionally markets that checklist BTC with out utilizing the order ebook construction. These are known as DEXes (decentralized exchanges), and are the bread and butter of DeFi. If you'd wish to know intimately how costs work with DEXes and liquidity swimming pools, you may learn my publish on that matter here. For the context of this publish, although, all it is advisable know is that DEX costs are saved according to CEX costs on account of arbitrage merchants buying and selling liquidity swimming pools in opposition to CEX costs. So, principally, CEX order books do 99% of the first shifting of costs, after which DEX costs are principally a mirrored image of CEX costs.

There you could have it, that’s how costs truly transfer. It's not attainable to know the way a lot a given purchase or promote will transfer a market cap except you recognize the precise state of the order books at that second on the change you're promoting on, in addition to the quantity of arbitrage friction between all markets.

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