Long-term investors strive to comprehend the correlation between company revenue, risk, and potential returns to achieve a balanced portfolio. Market capitalization is a statistic used by the global securities markets to determine the size of publicly listed enterprises. Similarly, in the worldwide crypto markets, market capitalization serves as a tool to ascertain the total value of a cryptocurrency.
Within the cryptocurrency community, many individuals tend to believe that coins with lower prices possess a greater likelihood of experiencing substantial value surges. This belief is in comparison to their higher-priced counterparts.
The idea of market cap will be explored in this piece. It will also detail how to apply it to compare the aggregate worth of several cryptocurrencies.
How Market Cap Works
Market cap indicates the total value of a company’s stock shares or all the coins circulating within the cryptocurrency domain. In the world of digital currencies, a coin’s market cap is calculated by multiplying the price at the moment by the total number of coins in circulation.
Market cap furnishes information about a particular cryptocurrency, encompassing its market positioning compared to other digital coins. This is precisely why it’s regarded as a more accurate metric than price and is employed for ranking.
Investors place substantial reliance on the market cap as a dependable and pivotal data point, which significantly enhances their potential for success.
Categories of Market Cap
Two market capitalization indicators are available in the cryptocurrency industry: the total market capitalization and the market capitalization for every coin or individual market cap.
Individual Market Cap
This market cap type is focused on the worth of individual coins. Usually, the size of a cryptocurrency is determined by its market capitalization, with a higher number suggesting a larger size. Analyzing the market capitalization of each coin proves valuable for evaluating individual coins as well as making comparisons with others.
Total Market Cap
The total market cap serves as an indicator of the overall value of the cryptocurrency market. It represents the collective worth of all coins present in the crypto space.
The total crypto market cap provides insight into the overall market size, with a total count of 10,198 digital coins. This concept facilitates the tracking of market growth over time. So far, the total capitalization of the industry is about $1,085,030,174,058.
How Do I Calculate Market Cap?
The market capitalization of a stock is determined by multiplying the price of one share at the moment by the number of outstanding shares. Similar to fiat currency, the quantity in circulation of a cryptocurrency is calculated by multiplying the coin or token’s current market price by its total supply.
As a formula, Market Cap = Price x Circulating Supply
For example, let’s calculate the current market capitalization of Cardano (ADA):
Cardano’s current circulating supply is 35,068,244,709 tokens for $0.26 (at the time of writing). Multiply the number of tokens (35,068,244,709) by the price ($0.26). This calculation yields ADA’s market capitalization of approximately $9,117,743,624.34, roughly $9.2 billion.
Why Does Market Capitalization Matter?
Market capitalization might seem relatively straightforward, but its significance extends beyond simplicity. Investors attach importance to market cap for a key reason: it serves as a means to evaluate one project in relation to another. The magnitude of a crypto project’s market cap often conveys its establishment and success compared to those with smaller market caps.
The market cap serves as a fundamental metric that traders and investors use in addition to denoting a cryptocurrency’s size. It establishes an essential baseline for analysis that subsequently guides the examination of other financial indicators.
Yet a cryptocurrency’s price alone fails to convey the complete narrative. The fact that one cryptocurrency is valued at $1,000 does not inherently denote its superiority over another priced at $500.
Within this context, market capitalization emerges as a more comprehensive tool. It offers a superior means to compare the worth of diverse cryptocurrencies. This reveals insights into their relative values and showcases their growth and dominance within the crypto landscape.
Factors That Can Affect Market Cap
Two primary factors that influence market capitalization are supply and price. These elements assume a crucial role in determining the overall value of a cryptocurrency within the market.
The supply of a given cryptocurrency impacts its market cap within the cryptocurrency market. When demand outpaces supply, the price experiences a surge, potentially influencing the cryptocurrency’s overall market cap.
Consider Bitcoin as an example, which has a preset supply of 21 million units. This scarcity in supply acts as a catalyst for driving its value upward.
In contrast, Ethereum doesn’t possess a predetermined total supply. However, some ETH tokens are either burnt or transferred to a blockchain destination that cannot be recovered.
This measure curtails the growth of its circulating supply, leading to a decline. Moreover, certain cryptocurrencies developed by companies adopt an unlocking schedule.
Only a percentage of their entire quantity is released into distribution during their very first coin sale in order to create scarcity and maintain value. The remainder gradually unlocks over a designated time frame. These strategies underline the significance of controlling supply to ensure the rarity and worth of cryptocurrencies in the market.
When a given cryptocurrency has only a limited number of coins in circulation, its market cap experiences a substantial increase. This happens particularly when the price of the cryptocurrency is elevated.
A cryptocurrency can have a significant market cap with a high price and low circulating supply. However, if a cryptocurrency has a large circulating supply and low price, its market cap might not increase.
What Makes Market Cap an Inadequate Measure of Value in Cryptocurrency?
For investors looking at cryptocurrency portfolios and potential, market cap is a fundamental tool. It offers a quick way to gauge a crypto project’s value and size.
The market cap, nevertheless, may not always be the best indicator of a cryptocurrency’s worth. It can be manipulated to create a false sense of worth, making it risky to evaluate projects solely based on it. For example, launching a token with a billion-unit supply and trading one token for a dollar can inflate the market cap to $1 billion. Therefore, relying solely on the market cap is not advisable.
Additionally, price rather than the actual value a project creates determines market cap. It reflects people’s willingness to pay more, is often influenced by sentiment, and isn’t necessarily linked to real value.
For instance, if demand surges briefly with reduced supply, the price and market cap can soar. Yet such surges might be short-lived and harm unsuspecting investors.
What Can You Do With Market Capitalization?
You can evaluate the worth of several cryptocurrencies and choose an investment strategy using market capitalization. Cryptocurrencies are classified into three groups according to their market cap:
Cryptocurrencies with market caps surpassing $10 billion belong to the large-cap category. Investors view them as lower-risk investments due to their established history of growth and typically higher liquidity.
This liquidity lets them absorb large volumes of people selling without causing drastic price fluctuations. Notable examples include BTC, ETH, USDT, BNB, and USD Coin, among others.
Cryptocurrencies with market caps ranging from $1 billion to $10 billion fall into the mid-cap category. They are generally perceived to possess greater untapped potential for upside, but this potential comes with elevated risk.
A few of these are; Litecoin (LTC), Dogecoin (DOGE), Shiba Inu (SHIB), VeChain (VET), Axie Infinity (AXS), Internet Computer (ICP), Polygon (MATIC), Stellar Lumen (XLM), and VeChain (VET). Many of these can be used for gambling at Bet999 online casino.
Cryptocurrencies with market caps under $1 billion are considered small-cap, making them prone to substantial price changes influenced by market sentiment. These investments carry the greatest possible degree of risk, but they also have the ability to yield substantial gains.
The alluring small-cap cryptocurrencies are Nord Finance (NORD), eCash (XEC), NEO, USDD, and Bitcoin Gold (BITG).
What Other Crucial Factors Should Be Considered Apart From Crypto Market Capitalization?
In actuality, many other factors besides market cap affect cryptocurrency. You will encounter small-cap coins that often outperform their larger counterparts due to having more growth potential. Let’s delve into various metrics to consider when evaluating cryptocurrencies:
This constitutes a segment of market cap, yet it possesses distinct implications. Cryptocurrencies with lower prices, such as Ripple, can experience larger percentage movements than higher-priced coins like Bitcoin. This discrepancy arises because the difference in dollar value is significantly smaller, leading investors to perceive these movements differently.
Active Trading Volume
Low active trading volume can affect how susceptible the market cap is to manipulation because of lower prices. Greater trading volume leads to a more accurate reflection of the ‘real’ value of the coin.
Circulating Supply and Maximum Supply
Circulating supply represents the current total available to users, while maximum supply signifies the eventual maximum coin count. In the case of Bitcoin, this renowned figure stands at 21 million.
These two factors hold significance because when a coin’s circulating supply is notably lower than its maximum supply, it introduces risk for investors. This unutilized supply has the potential to inundate the market in the future, precipitating price crashes.
This factor is part of all the elements mentioned above. When there’s a smaller circulating supply, lower active trading volume, and a lower price, volatility increases. Volatility can have positive or negative implications, contingent on your risk and return goals.
Can Market Caps Be Manipulated?
Manipulating the price of a coin can lead to manipulation of its market capitalization. This phenomenon is frequently observed in the case of small-cap coins, which are characterized by limited active trading volume and a relatively low circulating supply. In such scenarios, people can easily affect the price by pushing it higher or lower with just a few thousand dollars.
Such manipulation exploits the inherent vulnerability of smaller coins with reduced liquidity, allowing individuals to create artificial fluctuations in price that, in turn, impact the calculated market capitalization. This practice raises concerns about the accuracy and reliability of market cap figures, particularly for coins susceptible to such manipulative tactics.
As a result of this, investors and financial analysts should proceed with care. They should consider a range of factors beyond market cap when evaluating the value and potential of cryptocurrencies, especially those with smaller market capitalizations.
How Does the Market Cap Affect the Price of a Cryptocurrency?
Supply and demand dynamics determine a cryptocurrency’s price after it starts trading on the secondary market. A boost in buyer interest causes the selling value of the cryptocurrency to grow. Conversely, an abundance of supply without commensurate demand can decrease prices.
Market cap can potentially impact the mindset of buyers and sellers within the market, subsequently influencing the cryptocurrency’s price. Market supremacy and the probability of market manipulation are both indicated by high market capitalization. This leads traders and investors to gravitate towards purchasing more of the cryptocurrency through different ways with the highest capitalization.
Are Market Capitalizations for Coins the Same as Market Capitalizations for Stocks?
No, the formula remains consistent, but the commonality lies there. Stock market capitalization portrays the company’s equity value, signifying the worth of its ownership. This carries significant ramifications for business, credit, and operational considerations.
In contrast, coin market caps do not mirror equity within a company. Coins, distinct from shares, lack legal ties to the company, resembling currencies more closely.
When assessing investment risks, market cap serves as a valuable metric to compare total cryptocurrency values. However, it’s crucial to analyze market trends, the stability of a cryptocurrency, and your financial circumstances.
Given the cryptocurrency market’s highly volatile nature, driven by secondary activity, it’s advisable to conduct independent research, seek advice, and exercise due diligence before making additions to your crypto wallets. This is especially important before engaging with smart contracts.