by Zach Herbert and David Vorick of Sia

The token world is getting crazy, but last week’s Gnosis ICO pushed us over the edge. Gnosis investors bought up approximately 4.2% of the total GNO token supply for $12.5 million (250,000 ETH), giving the project a market capitalization of $298 million (as of April 24).

To be clear: this means ICO investors valued Gnosis — an unproven platform that is yet to be launched — at about $300 million. Moreover, the GNO token does not have any actual purpose except to exchange for WIZ tokens at some point in the future.

We at Sia feel that this ICO insanity cannot continue in its current form — something must give. If the bubble bursts, it will inflict damage on every token, including those that are most reputable.

Many in the community want to slow and eventually stop this trend. We think that, while investors are by no means rational, they need access to the best possible information in order to make informed decisions. However, it is clear that investors are completely misvaluing most tokens. So what gives?

Our hypothesis: the market cap indicator is highly flawed.

Market cap is so powerful because it allows investors to quickly assess total valuation of an asset. A flawed market cap calculation means that investors are not able to properly value a token without doing extensive research.

There are two major inputs to market cap: total supply, which is required to properly calculate present market cap, and inflation, which can be used to predict future total supply and therefore future market cap.

Total Supply

Every site we could find that lists out tokens by price, volume and market cap does so based on circulating supply rather than total supply. Circulating supply indicates how many coins are in circulation, but does not include coins held by the project. By contrast, total supply includes coins in circulation + coins held by the project.

Even worse, these sites don’t specifically tell users the differences between total and circulating supply. It seems that everyone is doing it wrong, and all but the most informed investors are being misled.

This flies in the face of basic valuation principles. When valuing a stock, for example, we value the market cap by calculating (share price)*(shares in circulation + shares held by company). We call this combo shares outstanding. We are not currently portraying token market caps this way, and it really throws off the results.