Sometimes, you'll come across cryptoassets that look ridiculously cheap, costing just a tiny fraction of a penny per token. So cheap that you could pick up millions of them for a relatively small, relatively affordable sum of money. Compare that to the likes of Bitcoin and Ether, where a single token would set you back many thousands of dollars.

The affordability of these tokens, combined with the apparent potential for massive financial gains, makes these ultra-cheap tokens particularly attractive.

The thinking often goes something like this. $100 today would buy -- let's say -- 100 million tokens. Then, if the price went up to even $0.01, they'd be worth $1 million. So it's a relatively small risk with a potentially life-changing reward.

And the best part is, those sorts of gains don't seem totally unreasonable. After all, similar things have happened many times in crypto's history. People used to buy Bitcoin for pennies and now it's worth more than $60,000. Compared to that, a new token going to one cent is almost reasonable.

But here's the thing. You almost certainly won't make extraordinary gains on these ultra-cheap tokens. And that's largely because these tokens often aren't cheap at all. Their enticing low prices don't tell the whole story.

In fact, an asset's price on its own will never provide enough information to make a truly informed valuation or investment decision.

This is an incredibly important concept to understand if you plan on putting any money into crypto. Knowing this could stop you from being misled, making bad decisions, and ultimately losing money.

In this video, I'll explain why this is and show you a better way of evaluating and comparing cryptoassets so that you can make better and more informed decisions.

Disclaimer

Before we get to that, I need to make it really clear that none of what I say should be taken as a suggestion or recommendation to buy or sell any specific asset or crypto in general. If I use something as an example here, it really is just an example -- not some kind of covert suggestion to buy or sell.

What you do with your money is entirely up to you. All I want to do is give you some crucial information to help you avoid a common mistake that many newcomers to these markets make.

Knowing this stuff won't stop you from losing money -- crypto is very risky and you can always lose what put in -- but it will certainly reduce your chance of failure and increase your chance of success. And that's about the best you can ask for.

So, with that warning out of the way, let's get into it.

The Price Isn't Right

When I described the usual thought process that goes into buying ultra-cheap tokens, I primarily focused on the price and affordability of those tokens. But, as I mentioned earlier, price on its own tells us very little.

It's not possible to look at a token's price -- even if it has many leading zeros -- and say "That's cheap".

This is because it misses another very important factor: the supply -- or the number of tokens.

Introducing Supply

For every asset, there is some number of identical or near-identical units that could -- at least theoretically -- be bought or sold at any moment. We call this number the circulating supply. Often, it's shorted to just 'the supply'.

For cryptoassets, the circulating supply only includes tokens that have been officially released while ignoring tokens that have been officially destroyed or 'burned'.

A token's supply can change over time.

Whenever tokens are created or unlocked -- usually to pay validators, team members, or early investors -- the circulating supply will increase. And whenever tokens are sent to a burn address, the circulating supply will decrease.

Every cryptoasset follows its own rules governing the creation, release, and destruction of tokens. Therefore, every cryptoasset will have a different circulating supply. And the difference in supply between different cryptoassets can be enormous.

Bitcoin, for example, has a circulating supply of just under 20 million tokens today. Meanwhile, Shiba Inu (SHIB) has a circulating supply of about 589 trillion tokens.

These differences in supply will inevitably result in different prices for different assets, even if they were identical in every other way.

Think of it like this.

Imagine two cakes, identical in every way other than the number of pieces they are cut into.

One cake is cut into 100 tiny slivers, the other into 8 generous slices.

Given the choice, would you pay the same price for a single slice of each cake? No, you would want to pay less for the smaller slice. It doesn't matter that it's still '1 piece' of cake, it is a relatively smaller portion and the price should reflect that.

It's a silly example, but it helps to demonstrate the relationship between price and supply. As the number of tokens increases -- or as the circulating supply increases -- the price of each token should decrease.

The Problem With Price

This presents a problem when it comes to evaluating assets.

If a token's price is affected by its supply, how can we know when a token is genuinely cheap and when it just appears cheap because its supply is very high?

Furthermore, how can we compare the value of two assets with different supplies? Cryptoassets tend to only be 'cheap' in relation to one another, so it's essential that we can evaluate them in a fair and equal manner.

Price simply isn't good enough.

To make truly informed investment decisions, we need a new valuation metric that accounts for potential differences in supply. We need something called market capitalisation, or market cap.

Introducing Market Cap

The market cap is calculated by multiplying the price of a single token by the number of tokens in circulation, thereby neutralising the effect of the circulating supply.

You can think of market cap as the hypothetical cost of purchasing every circulating token at the current market price. This gives us an indication of how the market currently values an asset as a whole.

Market Cap, It's A Piece Of Cake

In our cake example, this would be like looking at the price of each entire cake rather than the price of individual pieces from each cake. Therefore, it no longer matters if one cake has been cut into many more slices than the other.

Previously, we imagined the cakes were identical except for the number of slices they were cut into. Let's now say they are also different flavours, and we want to decide which one is a better buy. This is kind of like comparing two cryptoassets to decide which to invest in.

Let's say the 100-slice cake is a Victoria sponge, and each slice costs $0.25. The 8-slice cake is a chocolate cake, with each slice costing $2.5.

Which of these is a better deal?

At a glance, the Victoria sponge may seem cheaper.

After all, $2.50 will buy you just one slice of chocolate cake but 10 slices of Victoria sponge. That seems like a lot of cake for the money, so it must be a good deal.

But wait. Let's check the market cap of each cake.

For the Victoria sponge, it's $0.25 x 100 = $25.

For the chocolate cake, it's $2.5 x 8 = $20.

So, while it may look more expensive at a glance, and while you may get fewer slices for the same amount of money, the chocolate cake is actually cheaper.

In fact, it's substantially cheaper, costing 20% less than the Victoria sponge -- something you would never realise if you focused on the price alone.

Now that we have this standardised, fair valuation of each cake, we can make better decisions about which cake we want to buy -- if indeed we want to buy either.

For example, I would say that the chocolate cake is not just a cheaper cake but a better, more desirable cake. So, for me, it seems like a much better deal than the Victoria sponge.

If I had focused only on the price of an individual slice and bought what I initially believed to be the cheapest option, I'd have bought a less desirable cake at a worse price.

Of course, others will interpret those market caps differently and have different opinions.

Someone who dislikes chocolate cake and loves Victoria sponge cake might think the price difference is more than justified. For them, the chocolate cake may seem overpriced even though it's cheaper, while the Victoria sponge might be a bargain at twice the price.

Equally, someone could prefer Victoria Sponge cake but find it difficult to justify buying at the higher price. For them, the chocolate cake may still be a more attractive option despite generally preferring the alternative.

And yet another person might argue that both cakes are overpriced because they've seen a $10 coffee cake.

At the end of the day, everyone will have their own opinion about which cake is better, how much they think it's worth, and at what point it stops being a worthwhile purchase.

Relying on the market cap won't change those opinions, and it won't provide a magical truth to guarantee the right decision is made every time.

What it will do, however, is provide a strong foundation for everyone to make their decisions. It provides a standardised, fair valuation for every asset, cutting through the noise and preventing anyone from being misled by differing supplies and deceptive prices.

Why One Cent Is (Market) Cap

Now that we're thinking in terms of market cap, you may be able to see why tokens with incredibly high supplies are unlikely to reach prices of even a few pennies.

If they did that, then the market cap -- the valuation of the asset as a whole -- would be ludicrously high. People love to talk about their token going 'to the moon', and in these cases, the market caps would be truly astronomical, reaching levels that almost no one could justify.

Again, we can return to our cake example to get a sense of this.

A cake salesman with a poor understanding of market cap might think he could charge the same price for a slice of each cake, despite one being cut into many more pieces than the other.

Now, both the Victoria sponge cake and the chocolate cake cost $2.5 per slice.

Let's see what that does to the market caps.

The chocolate cake is still $2.5 x 8 = $20.

For the Victoria sponge, it's now $2.5 x 100 = $250

That's an absolutely insane price for a cake!

The number of people willing to buy a $250 cake would be very small. You'd either need to love Victoria sponge cake, or not understand market cap enough to know what you were buying.

Bringing It Back To Crypto

An example from the world of crypto might also be useful here.

Earlier, I said that SHIB had a circulating supply of 589 trillion tokens.

Today, each of those tokens is worth a few thousandths of a penny -- which looks pretty cheap.

Occasionally, people on social media might suggest that SHIB could go to $0.01 per token. For a newcomer to these markets, that doesn't sound crazy.

They might even think it could reach $0.10 or $0.20 because Dogecoin has reached those prices and it's a broadly similar asset.

However, these prices look unlikely when we consider the market cap.

At a price of just $0.01 per token, SHIB's market cap would be nearly $6 trillion. At $0.10, SHIB would be worth almost $60 trillion.

For context, the combined market cap of every cryptoasset today is about $2.5 trillion. Microsoft, meanwhile, is the world's most valuable company with a market cap of about $3 trillion.

That makes $5 trillion an exceptionally -- and perhaps impossibly -- large valuation for a memecoin.

I don't think SHIB will ever trade close to $0.01. And, if it does, it's probably because something truly crazy has taken place.

Therefore -- and, again, this is purely my opinion -- I wouldn't be buying SHIB with the expectation of life-changing returns from a tiny outlay.

The problem, as I mentioned right at the start, is that SHIB is more expensive than it first appears.

Yes, individual tokens cost very little. But its market cap is already around $15 billion, which I find difficult to describe as "cheap".

Perhaps it's cheap in historical terms, given its all-time high valued SHIB at over $40 billion. Or it could be cheap relative to the largest memecoin DOGE, which is currently worth about $22 billion. But is it cheap outright? Is it as cheap as its ultra-low token price suggests? Probably not.

Check Yourself Before You Wreck Yourself

Now, I'm not trying to pick on SHIB in particular. It just happens to be a good and relatively popular example of a high-supply token. But there are loads of similar assets out there.

These days, cryptoassets are often designed with intentionally high supplies. The teams behind these tokens know that most people prefer to own one million cheap tokens instead of one-millionth of an expensive token.

And people on social media tend to shill these high-supply tokens, often using the kind of argument I outlined earlier, where small investments could become vast if the price increases to a seemingly modest new value.

Wha tever the asset is, wherever you've heard about it -- and especially if the potential gains seem too good to be true -- it's a good idea to check the market cap before you buy.

It will stop you from buying something that is much more expensive than you first realised. And, if you still choose to invest, it will stop you from getting attached to fantasy price targets that are almost impossible to hit -- something that has led many to roundtrip their gains.

Where To Check Market Cap

So we've covered why you should look at market cap instead of price, but we haven't yet seen how to do it or where you can get that information.

There are plenty of tools out there that make checking market caps incredibly easy. CoinGecko is probably the most popular, but alternatives include CoinMarketCap and Messari. And for brand-new assets that aren't listed elsewhere, you can try a site like DEX Screener.

All of these sites will show you an asset's price, supply, market cap, and much more.

Using these tools, you can check on the market cap of the assets you are interested in, as well as the current and historic market caps of other, similar assets.

This will give you a sense of how the market values different types of cryptoassets, which will help you set realistic price targets. It will also help you decide if something is cheap and attractive, with plenty of room to run, or offputtingly expensive.

A Twist In The Tail

When using these sites, you might notice that they often include both a 'market cap' and a 'fully diluted market cap' -- and you might wonder why that is.

Remember how a cryptoasset's circulating supply can change over time, increasing as new tokens are issued or released?

The fully diluted market cap looks ahead, showing what the market cap would be if all those unreleased tokens were already in circulation. So it's the market cap using the maximum possible supply -- or total supply -- rather than the circulating supply.

This really deserves a video of its own, but I wanted to mention it here because it's increasingly common for cryptoassets to launch with a small fraction of their supply in circulation. That means the market cap can appear quite reasonable, while the fully diluted market cap is extremely expensive.

A good example of this is Worldcoin (WLD), which has only released about 2% of its total supply. While its market cap is about $1 billion, its fully diluted market cap is closer to $50 billion.

So this is another example of how a cryptoasset's supply can mislead investors into buying something more expensive than it first appears.

To avoid falling into this trap, it's worth checking both the market cap and the fully diluted market cap. If there is a very significant difference, then you'll need to think about which valuation is more realistic. After all, those different market caps will eventually converge as the unreleased tokens hit the market.

You must decide if the fully diluted market cap can be sustained, or if the token price will fall to accommodate that additional supply.

And the longer you plan to hold an asset, the more important these considerations are likely to be. After all, that's more time in which new tokens could enter circulation and -- potentially -- devalue your holdings.

Summary

We've covered a lot, so let's sum it all up.

Prices can be misleading. Tokens can look incredibly cheap simply because they have a high supply.

So, instead of looking at an asset's price, we should look at its market cap.

The market cap is calculated by multiplying the token's price by its circulating supply, providing a standardised valuation for assets as a whole.

With this measure, we can compare assets in a like-for-like way, without supply differences interfering.

This will help us determine if something is cheap or expensive, and create more realistic price targets that won't result in sky-high valuations.

You can use tools like CoinGecko to check the market cap of assets you are interested in.

While you're there, it can also be useful to check on the fully diluted market cap.

This shows what the market cap would be if every token was already in circulation.

Sometimes, you'll find that the fully diluted market cap is many multiples higher than the market cap. In these cases, you might need to think a bit more about which of those valuations seems more appropriate -- especially if you plan to hold for a long time.

But remember, while knowing this can stop you from making common rookie mistakes, it won't guarantee you success.

When you choose to invest in crypto, you are putting your money at risk and you could easily lose it all. For that reason, you need to think carefully about if you want to invest, and how much you can afford to lose if you choose to.

With that I will say good luck out there, thank you very much for watching, and I'll see you in the next video.

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Disclaimer: Anything expressed here is my own opinion stated for informational and educational purposes; nothing I say should be taken as investment or financial advice. Many projects mentioned on this channel are highly experimental and therefore come with risks. Please evaluate your own risk tolerance before experimenting with these projects, and remember that investing in cryptoassets is extremely high risk and could result in total loss of capital.

I may own some of the cryptoassets mentioned.