With over 18,000 different cryptocurrencies on the market, it may be difficult to know where to invest. When doing your research into a new cryptocurrency project, you will likely come across a few different metrics that are important to understand. Market capitalization, or market cap, is certainly one of them.
Market capitalization is a value used by investors to determine the success of a cryptocurrency. Typically, it is used in reference to the stock market, and it represents the total dollar value of a company’s outstanding shares. You can find it by multiplying the total number of a company’s shares by the dollar value of a single share at that time. Generally, stocks with a higher market cap are considered more conservative investments. In terms of crypto, the concept is very similar.
The cryptocurrencies that have been more widely adopted around the world, such as Bitcoin, are those that have a higher market capitalization. So, it may be worth familiarizing yourself with this concept to help you make informed decisions about your investments. We’re going to go over what market cap means in crypto, how to calculate a cryptocurrency’s market cap, and what value this knowledge brings to your research.
What is a market cap in crypto?
Like I said earlier, when it comes to crypto, the concept is very similar to that of the stock market. Just as with stocks, each cryptocurrency has a dollar value that fluctuates over time. However, a cryptocurrency’s market value represents the total value of all the coins in circulation. You can calculate this metric by multiplying the total number of coins that have been mined by the market price of each individual coin:
Current Market Price x Circulating Supply = Market Cap
That being said, there is an important distinction to be made between a crypto market cap and fiat investments. The market cap of a cryptocurrency is not necessarily equivalent to the amount of money that has been invested in that coin. For example, Bitcoin currently has the highest market cap at over $700B USD, but this doesn’t represent the actual amount of money that has been invested into Bitcoin.
This can be the result of a few different factors. If a cryptocurrency rapidly increases or decreases in demand, the market cap may be disproportionate to the dollar value of the total money invested. For instance, if a cryptocurrency has a circulating supply of 1,000 coins at $1 each, the market cap would be $1000. However, if a firm decided to buy 500 coins at $5, the market cap would technically become $5000 even though this is not the actual amount of money that was invested into this coin.
Alternatively, there can be a difference because cryptocurrencies aren’t guaranteed to sell as soon as they are introduced to the market. In the case where 1,000 coins are issued and priced at $1 but only 10 are purchased, the market value would still be $1,000. It is important to be mindful of these factors when doing your research to avoid misinterpreting i.
Valuing a cryptocurrency project
There are a few different metrics that can be used to interpret a cryptocurrency project, that must not be confused with market capitalization. The following are 3 different methodologies that represent different values…
Circulating supply
This is typically used to rank the popularity or the size of a cryptocurrency compared to others, and it is the method we have already covered. The circulating supply looks at the coins that are in circulation at that time and have already been mined.
Fully diluted supply (FDV)
FDV can be used along with other metrics to help investors estimate the future value of a cryptocurrency. It is determined by combining the value of the coins that have already been issued with the number of coins that have yet to be mined.
Max supply
This metric refers to the maximum amount of coins or tokens that will ever be created for a given cryptocurrency. Once this number is reached, no other coins or tokens can be minted.
You can learn more about Top Crypto Coins with Capped Supply in 2022 here.
Why can market cap be important?
While price does play a factor in measuring the value of a cryptocurrency, it’s also important to look at the bigger picture. Market cap can help investors get a better gauge of a cryptocurrency’s stability and its potential for growth. In general, a coin or token with a large market cap is less likely to face dramatic changes in price, making it a potentially safer investment than other cryptocurrencies. Although, it is important to keep in mind that the market cap of a cryptocurrency can change drastically if it faces high levels of price volatility.
What can you learn through market cap?
There is use in understanding market capitalization in order to compare the value of a cryptocurrency project versus another. Market cap can help investors get a better sense of a cryptocurrency’s volatility to help them make a more informed decision. The size of a market cap can be divided into 3 different categories: Large, Mid, and Small.
Large-cap
Coins or tokens considered large-cap have a market cap of more than $10 billion. The two most popular cryptocurrencies, Bitcoin and Ethereum, fall within this category. These cryptos are generally considered more stable, and therefore, lower risk investments. This is because they generally demonstrate stable growth and higher liquidity, so the price will not change drastically if a high volume of people decides to cash out at once.
Mid-cap
Mid-cap cryptocurrencies are those that fall within the range of $1 billion to $10 billion and are perceived as having higher risk than large-cap cryptocurrencies. Although, they may have more potential to see growth.
Small-cap
Those considered small-cap cryptocurrencies have a market cap less than $1 billion and are generally the most affected by changed in market sentiment, and therefore face higher levels of volatility. They are considered much riskier investments, but they can have an even higher potential for growth.
While market capitalization could bring value to your research before making an investment, it is not the only factor you should consider. Always be sure to exercise caution and consider other factors when looking into any cryptocurrency project.
