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An analysis on what it means to determine market cap for a company like Hedera
This article is in response to questions about how to determine what the market cap is for a public company, as Hedera will be, that does not offer shares to raise capital, but instead a cryptocurrency. This also discusses the somewhat controversial topic of the initial volume of HBARs (the name of Hedera’s token) to be released into circulation and security concerns.
Let’s start with a brief finance discussion.
In the Corporate Finance world with a Public Corporation there is:
[Authorized Stock (AS) = Treasury Stock (TS) + Shares Outstanding (SO)]
[Market Cap = (Earnings Per Share x some $USD figure} x number of Share Outstanding]
1. Authorized Stock (AS) = the total amount of shares that can ever be issued by the company (unless shares are ‘split’ or ‘reverse split’), determined at the time of original Incorporation. (AS) is neither issued to the public, nor ever has been issued to the public by the company. Once (AS) is ever issued to the public it is never considered (AS) again, but is always either (TS) or (SO). The amount of which (AS) is not used to determine ‘Market Capitalization’ or ‘Earnings Per Share (EPS).’
2. Treasury Stock (TS) = shares that were once (AS) issued to the public, and were likely once in Shareholder hands, that are now owned by the company through “Share repurchases,” held in the company’s Treasury by the CFO. (TS) are likely, but not necessarily issued to public at some previous point in time, but if so, were likely repurchased by the company in the open market. [one CorpFin method of rewarding Shareholders by increasing “Shareholder Equity” rather that issuing a Dividend]. The amount of which (TS) is not used to determine ‘Market Capitalization’ or ‘Earnings Per Share.”
3. Shares Outstanding (SO) are shares that are public traded, held in Shareholder hands. [(SO) were once (AS), see above], but once issued to the public by company they are never considered (AS) again. This number of shares ONLY, is used in both ‘Market Capitalization” and ‘Earnings Per Share.’
In Crypto World, I’ve noticed that people disregard ‘Earning Per Share’ (EPS), as the element which normalizes all companies to one another, and makes them comparable to each other. EPS, enforced by Generally Accepted Accounting Principles (GAAP), are vital and necessary, when multiplied by some market clearing $USD Price Per Share P(x), in determining ‘Market Cap’ of a given public enterprise in CorpFin World.
Currently, to get a true Market Cap of any Token or DLT ecosystem, there would have to be something comparable to EPS. Since, this is such a young and emerging technology field this is currently impossible. Disregarding Miner’s “profit” (if there is such a thing anymore) in PoW (proof-of-work) ecosystems are no such measurable that are equivalent to EPS. Thus, no true measure of Market Cap in the Crypto space.
As such, in the so called “crypto world”, there tends to be this magic leap straight from [(Circulating Supply x $USD token value) = Market Cap]. What is considered Market Cap is really a meaningless metric as there is no normalizing value (e.g. EPS) through which projects and/or ecosystems can be measured against one another to determine any true project value.
With regard to Hedera, it’s been often repeated that due to PoS (proof-of-stake) ecosystem chosen by the company, it is required that the circulating amount of HBAR be limited (at least for the first 5+ years) for cryptographic security reasons.
So, it’s axiomatic that it’s erroneous to lazily suggest Hedera as some kind of insanely, audaciously, self-inflated project value merely by multiplying Max Possible Minted tokens by some pre-release offering price.
As those who have been paying close attention to Hedera’s pre-release notifications know, in early months/years there will very few circulating HBAR relative to the total supply minted. And again, this is due to security reasons that relative scarcity is likely to continue for quite a long time.
I hope this clear and helpful!