What is Cryptocurrency Market Cap?
Market capitalization is crucial for investors who want to venture into financial markets, including cryptocurrencies. However, the market cap for the crypto market is a tad different from the traditional financial sector. Therefore, potential investors search for answers to the question – what is cryptocurrency market cap?
In the traditional system, the market cap is the total value of a company’s shares of stock. It helps investors decide whether to invest in a particular company. Additionally, it is a critical factor for judging a company’s worth and the trust of its shareholders.
On the contrary, market cap rules in cryptocurrency do not extract its basics from the conventional system. This article will discuss capitalization in the crypto market and how it is calculated.
So, stick around and read till the end to know the cryptocurrency market cap.
Let us get started!
Crypto Market Cap
Crypto market cap means the total value of a cryptocurrency. Where stock market capitalization is share price times outstanding shares, the crypto market cap is calculated by multiplying the number of coins in circulation by the cryptocurrency price.
For instance, the market capitalization of Bitcoin is the current number of coins that multiply the price at a given time. Since the prices of Bitcoin fluctuate, its market capitalization also keeps changing. Similarly, you can calculate the market cap of any cryptocurrency like Ethereum, Dogecoin, Tether, etc.
The formula for calculating the market cap for a particular cryptocurrency is as follows:
Market Cap = Price (X times) Circulating Supply
For further clarity, here are calculations of the crypto market cap for Bitcoin.
- $45,000 x 18.8 million = $846 billion (market cap)
- $55,000 x 18.8 million = $ 1.034 trillion (market cap)
For comparison, Ethereum’s market capitalization is about $351 billion ($3000 x 117 million).
Market Cap and Investors
In the traditional stock market, market capitalization becomes the basis for investment categorization: large-cap, mid-cap, and small-cap. The market cap is critical in devising an investment portfolio since investors put only some of their money in a single block.
Additionally, the market cap is one of the indicators of the overall worth of the company. Generally, large-capped companies are less risky than low-capped ones.
Contrarily, there is no such division in cryptocurrency. Since it is a relatively new concept, thus it will take time to group itself based on the market cap. Thus, for old and the newest cryptocurrencies, it does not depict the crypto size or its worth.
However, the market cap is a valuable concept, as it is handy in determining the scope or potential of a specific coin. However, investors should not just consider the crypto market cap before making an investment decision.
Therefore, market capitalization has a limited scope in the crypto market compared to the traditional stock trading market.
Factors that change Market Cap
Based on available information, the market cap of any given cryptocurrency depends on two variables: the supply of the coin and its price.
Let us explore how supply and price work in the crypto market.
- Supply
Supply is the global number of coins in circulation at a particular time. Thus, it affects the market cap of that cryptocurrency. However, supply is limited, as specific protocols are in place to check the total supply of coins in the market.
- Price
The price of a coin is another factor that determines its market capitalization. Even with a limited supply, a high price will result in a higher market cap. Contrarily, ample supply with low value adversely affects the crypto market cap.
There are coins with unlimited supply but have meager prices, resulting in low value on the market.
Importance of Market Cap
Market cap is not just a number but provides meaningful information about a cryptocurrency. It shows us how investors see crypto and its relation to its competitors.
Investors are more attracted to cryptocurrencies with large market caps, as the value of cryptocurrency somehow depends on its capitalization. Thus, the market cap becomes the basis for ranking cryptocurrencies.
Additionally, merely the price of crypto does not entirely depict its market position; this is where the market cap jumps as it is a more precise metric.
Furthermore, the market cap is an excellent indicator to reflect patterns and trends. For instance, a cryptocurrency associated with NFT starts experiencing fluctuations; it depicts the coin’s value increasing or decreasing.
Thus, we must keep an eye on the market cap, as it is a helpful metric in checking the worth of a particular cryptocurrency.
Fully Diluted Market Cap
So far, we have determined that market cap is the price multiplying the total supply at a particular time. But what happens if a crypto’s total supply is in circulation? Such a situation refers to a new concept called a fully diluted market cap.
In short, a fully diluted market cap becomes relevant when cryptos and all coins are released for trade. For instance, remember the 21 million limitations for Bitcoin? So, it will reach its fully diluted market cap once it hits this number.
Frequently Asked Questions
Is cryptocurrency market cap an excellent metric to measure its worth?
The market cap alone is not a good indicator to measure the overall value of a particular cryptocurrency. However, when combined with other factors, it can become helpful in determining the performance of a cryptocurrency.
Does price affect the market cap of a cryptocurrency?
Price is one of the variables on which market cap depends. So, price does affect the market cap value. The other variable is the supply of cryptocurrency.
Why is market cap necessary in crypto?
Market cap indicates the overall valuation of coins in circulation and becomes the basis for investment decisions in some instances. Investors can use it to make a comparison between different cryptocurrencies.
Parting Thoughts
Market cap is the outcome of the price multiply the number of coins in circulation at a particular time. It is a straightforward formula:
However, it determines a cryptocurrency’s dominance, popularity, and value on the market. Two variables affect market cap – the price of the cryptocurrency and its supply. A coin can have a large market cap with a small value and vice versa.
Further, recently investors have started categorizing cryptos based on their market cap as mega-cap, large-cap, medium-cap, and small-cap.
Additionally, investment decisions should not only be extracted from market cap but add other vital factors, with a fully diluted market cap being one.
Please leave feedback in the comments section; we would love to hear your take on the cryptocurrency market cap.