One thing I often see on the crypto forums and sub reddits among newer investors is the confusing of market cap with the amount of money invested in crypto. It seems most people think that if the crypto market cap is $700 billion, that means that $700 billion has been invested in crypto, but this is incorrect, and in fact the real numbers are very far apart. So confusing these two figures really distorts your perception of the market and the impact of certain factors around the marketplace.

But first, a little warning. For the sake of this article, I am going to somewhat oversimplify terms and concepts, however the main points will be correct. If you want to learn more details, you can Google any topic or term you see here and start digging down the rabbit hole. But just remember these are simplified examples to illustrate a complex concept.

The money invested into a market is referred to as inflow. This is the actual real money that has gone into a market. For example, in crypto when someone goes to Coinbase and buys BTC with cash, that’s inflow. The market cap is the current circulating supply of the assets multiplied by the current price of those assets. As I said earlier, these numbers are often very far apart, as I will explain below.

Let’s give a simple example. Say there is an island that has 5 homes on it. I land on the island and buy 3 of the homes for $200K each. Now, the other two remaining home owners list their homes for sale at $200K as that is now the market price. The market cap for the island’s real estate is $1 million (200K x 5). However, that amount of money was not actually invested. Only $600K was actually invested. The $600k was the inflow, the $1 million is the market cap.

So as this relates to crypto, not all the coins in circulation were actually purchased at the current price, and in fact many of the coins were not purchased at all due to pre-mining and other things. So the market cap is often much, much higher than the actual money invested into the market.

So how much was actually invested into the crypto market? Well according to research at JP Morgan, when the market cap was around $300 billion for crypto, the net inflow was around $6 billion. That means that only $6 billion was actually invested, not the $300 billion.

So what is it now? Of course, the calculation is not linear, but for simplicity let’s just say it is. That means the current market cap of $600 billion was the result of approximately $12 billion of net inflow. Although it is probably less due to the properties involved, so my actual guess would be around $8 billion. But for simplicity let’s split the difference and say $10 billion.

That means the entire amount of money actually invested in crypto is only around $10 billion at this point. As you can see, this is much smaller than the market cap of $600 billion. Also, this puts a lot of other factors into new perspective as well.

For example, let’s look at the Tether scam and how Tethers were used to artificially inflate the price of BTC. Most people look at the market cap and say Tethers are such a small percentage of that so it should have no real impact. However, when we look at net inflow, the actual money invested into crypto, the total is only $10 billion as we estimated earlier. This means that Tethers could be responsible for as much as 20% of the current market cap! The implications of this would be catastrophic for the overall markets if this were true.







To go back to my earlier example of the island where I bought the houses. Imagine if after I bought the houses, it was found out that I had used counterfeit money. That means that there was no real demand for those houses. The prices would fall dramatically as the inflow and market cap were artificial. Nobody really bought the homes for $200K as the money used was fake. The market would go back to what it was before I introduced the fake money.

As I said at the beginning of the article, understanding the difference between market cap and inflow is crucial for having the correct perspective when discussing different dollar amounts and the impact they have on markets.

Remember guys, trade smart, and never get left holding the bag.