Investors are always interested in metrics to measure the value of individual cryptocurrencies and the broader market. One statistic frequently discussed is market capitalization or market cap, a simple statistic to discern how large or small a digital currency is.
Investors are always interested in metrics to measure the value of individual cryptocurrencies and the broader market. One statistic frequently discussed is market capitalization or market cap, a simple statistic to discern how large or small a digital currency is.
This calculation frequently changes as the price of a crypto asset decreases or increases based on supply and demand and other factors. Stock traders will be well familiar with a market cap as an approach for estimating a company’s value.
The idea works identically in the world of cryptocurrencies as a method for discerning what the market believes is the value of a specific coin. Investors use this information to compare the dominance amongst different projects aside from considering the price, which is sometimes an inaccurate yardstick.
This article will dive into the concept of market capitalization in more detail, how it’s calculated, why it’s essential, and some of the limitations.
What is the market capitalization in cryptocurrencies?
The market cap in cryptocurrencies takes a project’s current price multiplied by the total amount of coins in circulation, expressed in US dollars. At the time of writing, Bitcoin’s market cap is $598 248 172 940 (which is the highest), according to CoinMarketCap.
This calculation takes the coin’s current price of $31 883.89 multiplied by by 18 763 337 BTC, the current number of coins in circulation:
$31 883.89 X 18 763 337 BTC = $598 248 172 940 (or approximately $598 billion)
Comparable to stocks, we can class cryptocurrencies according to different categories:
- Mega cap: over $1 billion (Bitcoin, Ethereum, Tether, Binance Coin, Cardano, etc.)
- Large-cap: $100 million to $1 billion (Synthetix, Enjin, Flow, Holo, etc.)
- Mid-cap: $10 million to $100 million (Venus USDC, Utrust, Centrality, etc.)
- Small-cap: $1 million to $10 million (JulSwap, Viacoin, Metaverse, etc.)
The main advantages of market capitalization
Observing this metric tells investors how valuable a particular cryptocurrency is in the market. Coins with a market cap in the hundreds of billions like Bitcoin often exhibit less volatility compared to less-established projects that can be more volatile due to their diminished popularity and investor interest.
Some investors may diversify their portfolios based on the different categories for greater exposure. For instance, someone might deploy 50% into the mega-cap coins, 25% into the large-cap, and the remainder in the mid-cap.
One factor significantly affecting the market cap of cryptocurrencies is the total or maximum supply of coins, particularly for less popular altcoins. This is the best estimation of how many coins will exist in the lifetime of a project, predetermined according to that coin’s blockchain rules.
Scarcity, as with any other market, is one of the primary drivers in high valuations. Larger-capped coins like Bitcoin, Cardano, Litecoin, and Bitcoin Cash (most of which have a capped supply) are inherently more valuable and tend to be priced more expensively, often in tens, hundreds of dollars, or more.
In contrast, smaller-capped coins tend to possess an enormous maximum supply in the hundreds of millions or billions, with some technically having an infinite distribution like Dogecoin. Investors don’t typically favor these projects since they are considered inflationary. Hence, they usually cost far less, typically a couple or hundreds of cents.
How important is market capitalization?
Of course, market capitalization is not the only aspect to consider when discerning the current and potential value of a cryptocurrency. Many experts see this as an undesirable legacy of the equities markets where investors might only use this metric alone to make investment decisions.
As with stocks, the fundamentals of a particular coin are also important. One misconception of market cap is in believing the metric suggests the money inflow within a specific coin. In other words, the market cap is not necessarily an indication of how much money has gone into the market.
As we’ve seen, the formula only considers the price and total supply. Any slight variation in the value can add or subtract millions of dollars in the market cap, which may not imply anything about the money that’s been invested.
Moreover, there is the argument of price and market cap. For instance, although Litecoin presently costs $117, it has a much lower market cap than XRP, which is only valued at $0.57 presently.
Nonetheless, the market cap does give a bird’s eye view of the volume and liquidity of a specific cryptocurrency. A higher market cap implies greater volume and liquidity where a small group or individual cannot drastically move the price of the asset in question.
In contrast, a lower-capped coin is susceptible to ‘whales’ who can easily sell a large portion of their holdings, exhibiting a noticeable and detrimental price difference.
Best resources for finding market capitalization data
Established in 2013, CoinMarketCap is the most popular go-to place for keeping track of market cap and other statistical data about cryptocurrencies like price, profiles, initial coin offering calendars, circulating and total supply figures, 24 hour and 7-day volume changes, and much more.
Other well-known websites with similar functions include CryptoSlate and CoinGecko. These are valuable resources for observing the popularity of each cryptocurrency regularly for better decision-making.
Final word
All in all, market capitalization is a crucial measurement of the relevancy of a particular cryptocurrency, helping investors to make more informed trading decisions.
It is one of the most objective methods of assessing which project is the most dominant without relying on subjective opinions from other users. Fortunately, we have the luxury of accessing several resources, making the process of calculating this statistic simpler.
Like evaluating any other asset, it’s not the only thing that matters; however, it is regularly the first reference point.
