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  • Writer's pictureOne Hat Research LLC

The Market Capitalization Illusion

Market capitalization does not equal market value. Demand curves for fungible assets like common stock or cryptocurrency are downward sloping at any given point in time, implying that even a small additional sale, all else equal, may have required a lower price to induce even a slightly larger transaction. Much larger transactions would require larger price decreases with perhaps very large price decreases needed to move all units from current owners to new owners. The market capitalization illusion - equating market capitalization with market value - means investors are less wealthy than they believe and helps explain investor surprise at "crashes" when demand for immediate sales spikes. The market capitalization illusion is spread through the reporting practices of fiduciaries and other investment managers.

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