Adam Sharp

Beware the Cardano Price Mirage

This week I struck up a conversation with another parent at my kid’s tennis lesson. The topic of cryptocurrency came up.

This gentleman — whom we’ll call Bill — told me that he likes Cardano (ADA) and Dogecoin (DOGE) because they’re so much cheaper than bitcoin and ethereum. He mentioned that Cardano currently trades at just over $2 and Dogecoin trades around $0.20. Bill feels it’s too late to get into bitcoin at $40,000 or ethereum at $3,000. 

Cardano trades at 1/18,000th the price of bitcoin and 1/1,200th the price of ethereum. Dogecoin trades at an even smaller fraction of the blue chip coins. So it’s easy to see why newcomers are attracted to these “cheap” coins. 

But like many retail investors, Bill didn’t understand that price is only one factor that determines the real value of a cryptocurrency (or a stock). Price, by itself, is meaningless.

Far more important than price is market capitalization. Market cap takes into account both price and the number of coins in circulation. 

Market cap = price multiplied by coins in circulation

So although Cardano does currently trade at “just” $2.21, there are 32 billion Cardano tokens in circulation today. That gives it a market cap of about $70 billion, almost one-tenth that of bitcoin and one-fifth of ethereum. 

The difference here is that there are only 18.8 million bitcoins and 117 million ethereum in circulation today. So no, Cardano is not cheap because it trades at $2.20.

The Price Mirage

Cheap coins with huge circulating supplies are a magnet for amateur investors. They often believe that a low price implies that they’re “getting in early.”

But as we see with the Cardano example, this simply isn’t the case. Cardano today is worth about as much as bitcoin was back in March 2019 and worth 10 times what bitcoin was in May 2016 (according to CoinMarketCap data). And Cardano is now worth the same amount that ethereum was back in early December 2020.

So does Cardano have the traction and potential to justify this lofty $70 billion valuation? I’m skeptical. 

Cardano is an Ethereum competitor. It recently launched its long-awaited smart contract platform, which promises cheaper and faster transactions. But so far, progress on real-world adoption seems to be muted. The Cardano-based NFT projects that have launched have not taken off.

Meanwhile Ethereum has millions of active smart contracts. It powers the vast majority of NFTs, representing billions of dollars of real economic activity. It hosts the Ethereum Name Service, stablecoins and a massive lending and trading ecosystem. 

Cardano bulls will tell you that Ethereum’s shockingly high transaction fees (gas) are its Achilles’ heel. And there’s certainly truth there. The fees to transact on the Ethereum network are sky-high, often ranging from $50 to $200. This is certainly not sustainable, but it’s being addressed by a number of scaling solutions — such as Polygon — that show promise.

But the reason Ethereum fees are so high is primarily due to record-breaking demand. Cardano doesn’t have that kind of demand.

Overall I’d say Cardano is vastly overvalued compared to much more established projects like bitcoin and Ethereum. The fact that Cardano trades at one-tenth the market cap of bitcoin is absolutely insane to me.

For more on my thoughts about Dogecoin, read this.

Buy Quality, Not Cheap

When evaluating crypto investments, it’s important that investors look at market cap, not price. When people make investment decisions based on what’s cheap, they tend to end up with low-quality assets. Moreover, investors need to look at the fully diluted market cap, which takes into account coins that have been created but not yet released into the market.

After our conversation at tennis practice, Bill seemed a little embarrassed by his misunderstanding. But there’s really no need to be. All crypto owners have been there at one point. I was happy to have the chance to teach him something useful. 

By the way, all of this applies to stocks just as much as it does crypto. Every public company has a completely unique number of shares circulating. So when you’re considering what stocks to buy, you can 100% ignore the price. Look at market cap, growth, price/earnings, cash flow and other real fundamentals. 

There’s also a mistaken belief that lower-priced investments have the potential to generate higher percentage returns. This is utterly false. If a stock’s earnings go up 10 times, it doesn’t matter if shares start at $1 or $100. The return on investment will be the same in the long run.