In terms of cryptocurrency, market capitalization, or market cap, is the value sum of all coins mined for a cryptocurrency. You calculate this indicator by multiplying the current market price of a single coin with the number of coins currently in circulation.
In traditional financial economics, the market cap is the sum of all shares in a company’s stock expressed in dollar value. When it comes to cryptocurrencies, a crypto’s market capitalization shows the value of all coins mined, also expressed in a fiat currency.
How to Interpret Market Capitalization
Market cap can help you roughly gauge an asset’s future stability. However, you should never lose sight of the fact that even Bitcoin — the largest market cap among cryptocurrencies — still experiences volatility.
Regardless, a cryptocurrency with a larger market cap will be more stable than one with a smaller market cap. Why? Think about crypto market caps as ships on the sea. A larger ship is more likely to navigate heavy weather safely, while a smaller ship will typically be at risk of sinking. Conversely, digital currencies with lower market caps are more vulnerable to market fluctuations, and can experience dramatic gains or losses.
Important consideration: When researching this indicator, you might encounter references to “circulating supply” market cap, and “fully diluted supply” market caps.
In the example of Bitcoin, the “circulating supply” refers to the 18.5 million coins that have been mined. On the other hand, the “fully diluted” supply refers to the 21 million coins that will eventually be mined. Depending on the method, some observers measure market capitalization using the current circulating supply, while others choose to use the fully diluted number.
Why is Market Capitalization Important?
Observing the price is only one method to determine the value of a cryptocurrency. Market cap helps investors understand a wider picture and compare the values of various cryptocurrencies. Therefore, this indicator is a crucial statistic that can show the potential growth of a cryptocurrency, and whether it is safe to invest in.
Let’s observe the market caps of two fictional cryptocurrencies to demonstrate:
- Cryptocurrency A is worth $400,000. It has 400,000 coins and each coin is worth $1
- Cryptocurrency B is worth $200,000. It has 100,000 coins in circulation, and each coin is worth $2
Despite Cryptocurrency B having a higher individual coin price than Cryptocurrency A, its total value is half that of Cryptocurrency A. However, it is vital to remember that many cryptocurrencies’ market caps can change quickly and dramatically as a result of their volatility.
The Value of Understanding Market Cap
Market cap lets you compare the total value of different cryptocurrencies, allowing you to make more profitable and effective investment decisions. Generally, there are three types of cryptocurrencies according to their market capitalization:
- Small-cap cryptocurrencies
- Mid-cap cryptocurrencies
- Large-cap cryptocurrencies
Small-cap cryptocurrencies’ market capitalization is less than $1 million. They are more susceptible to market sentiment and experience more frequent dramatic swings.
Market caps for mid-cap cryptocurrencies range between $1 billion to $10 billion. They are riskier, but also generally have higher potential upsides.
Lastly, the market cap for large-cap cryptocurrencies like Bitcoin and Ethereum is more than $10 Billion. They are considered lower-risk investments because of their often higher liquidity and proven track record of growth. Their higher liquidity means that these cryptocurrencies can withstand higher volumes of people cashing out without dramatically impacting the price.
Summary
Market cap can help you compare the total value of various cryptocurrencies. However, your unique financial situation, the stability of a cryptocurrency, and market trends are all critical factors you should account for when weighing the risks associated with any investment.
Disclaimer: For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.
