This article is for informational purposes only. The information is not meant to be and does not represent financial, investing, trading, or other types of advice or recommendations.
For stock traders and investors, market capitalization is an essential consideration. For crypto investors, though, the situation is different.
While stock market capitalization (the entire value of a company's total shares of stock) can contribute to the formation and growth of a well-balanced investment portfolio. Experts argue that similar principles do not apply to crypto investors.
Here's everything you need to know about market cap as a crypto investor, and how it should affect your approach.
What Is Cryptocurrency Market Capitalization?
Market capitalization refers to the total monetary value of all shares of a company's stock. The market cap in cryptocurrency is made up of all the coins that have been mined. You can see it as the total value of a cryptocurrency.
Investors utilize market capitalization to give a more complete picture and compare the value of cryptocurrencies. It may indicate a cryptocurrency's growth potential and if it is safe to acquire in contrast to other cryptocurrencies as a critical statistic.
How Do You Calculate Crypto Market Cap?
The current price multiplied by the circulating supply determines a cryptocurrency's market cap.
Market cap = current price X number of mined coins
If a cryptocurrency has 300,000 coins mined and each coin is worth $2, its market capitalization is $600,000. Another cryptocurrency might have 150,000 coins produced, each worth $3, resulting in a market cap of $450,000. Despite the fact that a unit of the second cryptocurrency is worth more than a unit of the first, the first cryptocurrency has a greater value.
For example, the market capitalization of Bitcoin is calculated by multiplying the current number of coins in circulation (over 18 billion) by the price of Bitcoin at the time. Bitcoin's market capitalization varies as its price fluctuates, which it does regularly. Let’s say the current price of one Bitcoin is $50,000. We could calculate the market cap like this:
$50,000 x 18.8 million = $940 billion
Coinmarketcap is the most popular platform for keeping track of cryptocurrency market capitalization and getting an idea of how successful each coin is. It also includes the most widely used cryptocurrency index, which includes all essential financial data for cryptocurrencies.
Market capitalization may be thought of as a broad indicator of how stable an asset is anticipated to be. It's worth noting that even Bitcoin, the cryptocurrency with the largest market capitalization, is subject to fluctuation. A cryptocurrency with a lot higher market cap is more probably going to be a more stable investment than one with a much lower market cap, just as a larger vessel can safely traverse strong weather. Digital currencies with lower market capitalization, on the other hand, are more subject to market impulses and can experience massive gains or catastrophic losses as a result.
Circulating Supply vs. Fully Diluted Supply
The circulating supply is different than the fully diluted supply.
Another approach to estimating a cryptocurrency's future worth is to calculate what is known as the fully diluted market cap. A fully diluted market capitalization is the total value of a cryptocurrency at today's price if the whole future supply of coins were in circulation.
Let’s look at the Bitcoin example. 18.77 million Bitcoins had been mined as of August 2021, leaving about 2.3 million in circulation. As a result, the completely diluted market cap may be calculated as follows:
21 million x current price of 1 BTC
Some analysts may use the circulating supply to calculate the market cap, while others will use the fully diluted amount, depending on their approach.
What Does the Crypto Market Cap Mean for You?
Even while a cryptocurrency's market cap is still considered the most essential measure of relevance, the principle underlying it is frequently questioned. The reason for this is that a cryptocurrency's market cap somewhat indicates its long-term popularity.
Based on their market capitalization, cryptocurrencies are classified into three categories:
- Large-cap cryptocurrencies, such as Bitcoin and Ethereum, have a market value of more than $10 billion. Investors consider them to be lower-risk investments since they have an established track record of growth and typically more liquidity. This implies they can handle a larger number of people cashing out without the price being harmed considerably. Investing in cryptocurrencies with a high market capitalization is typically a safe bet. These coins will most likely be less volatile than other cryptocurrencies, but they will still be more volatile than traditional assets such as stocks.
- Mid-cap cryptocurrencies have a market value of $1 billion to $10 billion, and they are believed to offer more untapped investment potential. At the same time, they bring a lot more risk than low-cap cryptocurrencies.
- Small-cap cryptocurrencies, defined as those with a market capitalization of less than $1 billion, are the most sensitive to market mood swings. They have a lot of potential for high short-term growth, but can also crash in a minute.
Wrapping up
Let’s make one thing clear: Cryptocurrency is a relatively new concept. These sorts of categories have yet to be established because the technology is so new. And, since experts recommend sticking to Bitcoin and Ethereum and not letting crypto account for more than 5% of your whole portfolio, there's less of a need to consider market cap when making investing decisions.
Knowing the market capitalization of a cryptocurrency is useful if you want to understand the breadth of the potential of a particular token, but it shouldn't play as significant a role in your investment decisions as it does in the stock market.
We always advise doing extensive research before investing in cryptocurrencies and taking into account all important variables. For example, market capitalization as a measure doesn't tell you anything about actual trading volumes in the past few hours. Before investing, it's a good idea to check the 24-hour trading volume on several exchanges over a fair amount of time, as well as other key aspects.
Market capitalization is a helpful statistic for evaluating the overall worth of cryptocurrencies. However, when assessing the dangers of any investment, you must also consider market trends, a cryptocurrency's stability, and your personal financial condition.
