With over 22,000 tokens in the crypto market, it is necessary to segment the market and filter for investable tokens. In this note, we provide a guide to narrowing down the universe to what is investable.
Filtering the token universe by size is a useful starting point. Most existing tokens are microcaps, where the capitalisation of each token is less than 0.01 percent of the crypto market. Although microcaps account for over 99 percent of tokens in terms of numbers, their aggregate value is less than 2 percent of the total market.
Applying this 0.01 percent cut-off as the minimum criterion for investability leaves a universe of 200-300 tokens, which account for about 98 percent of the total market capitalisation.
The following chart shows the distribution of tokens by number and size. Based on this distribution, we determine the thresholds to dissect the market into small-, medium- and large-cap segments. If we eliminate the small caps (tokens with a share of less than 0.03 percent of the total market), we are left with around 100 tokens and 96 percent of the capitalisation, while the large-cap cut-off of 0.1 percent of the total market results in around 50 tokens and 92.5 percent of the aggregate capitalisation.
Investors who want to invest in the most tradable tokens can restrict themselves to mega caps – tokens with at least 0.2 percent of the total market capitalisation, or approximately 30 tokens that still account for 90 percent of the market.
The distribution of crypto assets according to the capitalisation as a percentage of the total market
What makes a token investable?
Market capitalisation is a good first filter, but it is important to use circulating or liquid capitalisation as tokens with a large portion locked up with early investors, founders or in the project’s treasuries are not easy to trade.
In addition to size, liquidity is also a very important factor. The intended investment size must be compared with the average daily traded volume. Ranking tokens by a combination of capitalisation and liquidity is a better starting point than ranking by capitalisation alone. When analysing liquidity data, it is important to limit traded volume data to reliable exchanges where there is reasonable confidence that the reported volumes are real and executable rather than ‘wash trading’.
While size and liquidity are necessary conditions for tokens to be investable, they are not sufficient conditions. Projects without a real ecosystem and meaningful user base are fundamentally worthless, and it is advisable to stay away from them even if a bubble in their price makes them appear sufficiently large and liquid. So-called ‘meme’ coins fall into this category, but there may also be other tokens whose price is ‘pumped’ for at least some time without any real underlying economic activity behind them. To exclude hyped tokens without substance, we filter projects by the size and growth of their user base and activity on the platform.
Finally, the technical merit of projects is also very important in a market based on new technologies, as vulnerabilities in the code can destroy projects. In the case of blockchain protocols, constant innovation, upgrades to the platform, and continuous efforts to fix bugs are crucial. Therefore, we further filter projects by the size of the developer teams and development activity in terms of code commits, while smart contracts are filtered by the quality of the code.
Combining these filters – size, liquidity, user base and technological quality – narrows the crypto market to an investable universe.
Further limitations may reduce the size of the investable universe, such as the availability of a high-quality custody and trading solution for the token and any restrictions imposed by regulators or the rules of trading venues.
How to categorise tokens
After narrowing down the crypto market from over 22,000 tokens to an investable universe, the different token types need to be identified, such as stablecoins, tokenized assets, NFTs, or the native tokens of blockchain protocols and decentralised applications, and tokens issued by private companies. The price behaviour of these token types is very different.
After selecting the relevant market segments, it is helpful to sort the tokens into sectors to form clusters of projects engaged in the same activity. This is a good starting point for understanding the drivers and developing views.
Tokens within the investment universe can also be seen as beneficiaries of various trends and themes. For example, the success or failure of the decentralised finance (DeFi) sector will impact the blockchain protocols with the largest market share of DeFi applications built on them or decentralised data oracles that provide the external pricing data that DeFi protocols need to operate their smart contracts.
The above steps for segmenting and filtering the crypto market help narrow down the token universe to genuinely investable crypto assets. At the same time, they provide a structured approach to constructing institutional-grade crypto portfolios.
Sygnum is the world’s first digital asset bank, and a digital asset specialist with global reach. With Sygnum Bank AG’s Swiss banking licence, as well as Sygnum Pte Ltd’s capital markets services (CMS) licence in Singapore, Sygnum empowers institutional and private qualified investors, corporates, banks, and other financial institutions to invest in the digital asset economy with complete trust. Sygnum operates an independently controlled, scalable, and future-proof regulated banking platform. Our interdisciplinary team of banking, investment, and Distributed Ledger Technology (DLT) experts is shaping the development of a trusted digital asset ecosystem. The company is founded on Swiss and Singapore heritage and operates globally. To learn more about Sygnum, please visit www.sygnum.com.
This information was prepared by Sygnum Bank AG. This information may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Bank AG, its affilitates, and partners at the time of writing. This is for informational purposes only and contains general material. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Bank AG to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and it should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analysis contained here have been compiled from sources believed to be reliable. However, Sygnum Bank AG makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.
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