Understanding Cryptocurrency Market Cap
In the financial world of today, we often hear news of an asset’s market capitalization reaching some specific number, but what is market cap, and why does it matter in the context of Crypto? Let’s find out…
Cryptocurrency enthusiasts always fish for altcoins that appear to have big potential, and market cap is something that can help them determine that… and just for the record, the Crypto market has reached a combined market cap of $224,839,389,625! That’s a BIG number, eh?
Let’s try and break down why market cap is such an important metric when analyzing the Crypto space!
What is Market Cap and How to Define it in a Crypto-Context
Generally, market capitalization measures the value of a security. How is it calculated? By multiplying the amount of outstanding stock shares by the current stock price.
When it comes to Cryptos, it’s defined as the circulating supply of tokens multiplied by the current price. So, say a coin has 1,000 tokens outstanding and is worth $10 a token, it has a market cap of $10,000 (1,000 x 10 = 10,000).
Let’s take the all-time favorite – Bitcoin – as an example. At the time of writing, there are around 17,199,225 bitcoins in existence, and the current price is $6,381.23 per bitcoin. Do the math! Bitcoin’s market cap is $109,752,243,336, which is the highest market cap in the Crypto market.
Keep calm! You don’t need to do the calculations, Google will help you out. There are plenty of websites available online to tell you exactly what each Crypto’s market cap (as well as circulating supply, price, volume, etc.) currently is.
What Can a Crypto’s Market Cap Tell Me?
Actually, a lot!
There is detailed technical analysis available for the more experienced traders. If you are keen on reading charts, you should definitely learn more about technical analysis. However, if you are a beginner trader in the wide Crypto-world, market cap is where you should start.
Market cap allows you to very quickly and easily (time is money!) check how valuable a Crypto is. At this moment, Bitcoin is still the king of coin ranking (see above). Ethereum comes second with the circulating supply of 101,218,710 ETH and a market cap of $37,022,924,713. Ripple is the last one in the Top 3 Cryptos by market capitalisation, boasting 39,299,874,590 XRP in circulation and an impressive $13,691,920,345 total market cap.
Interestingly, not all Cryptos have a defined market cap. If you have a look at the list of all the existing Cryptos and their market caps, the last one to have it defined is Crypto #1429, POLY AI. By the way, if you’ve read our previous article, you probably remember that the total number of Cryptos in existence is 1,754, and counting! If you haven’t, check it out. There are new altcoins created every single day, which means the total number may change by the time this piece has been published.
What Else Can Market Cap Do?
The market cap of a Crypto can also tell you on what scale the coin is resistant to volatility. As you may already know, Cryptos are extremely volatile. In fact, it is one of the most volatile markets in the world. There is a lot happening across the globe every day, and major news hits the financial markets really hard. It can leave you breathless in a positive way or with a nasty scar of a substantial loss.
The point is, Cryptos with a low market cap will probably suffer when big news comes, while the titans of the Crypto market, like Bitcoin, Ethereum, or Ripple, will remain largely immovable.
Can I Predict the Future with Market Cap?
Not really. Market cap reveals how things are at the moment. It is important to realize that people can only speculate about the price of a Crypto going up (or down, for that matter). Otherwise, the main idea of trading would cease to exist.
However, here’s something for you to think about. If the coin marketcap blasts and exceeds all expectations, the potential future growth is likely to be slow. Why? Financial growth has its limits. On the other hand, no growth is also an option. The Crypto titans tend to be sustainable, whereas the emerging coins may explode in an instant – you just never know.
Tricky Market Cap
There are misconceptions that play a big role in creating false Crypto valuations. Let’s have a look at one of them…
So, your friend created an altcoin with a considerable circulating supply, say, $1 million. He managed to get it listed on a small exchange for a price of $1 a token. Wow, that means that the total market cap of his coin is $1 million!
Stop right there and think again. Technically, yes. In reality, his altcoin has no true value as there are no substantial daily trading volumes (except for a few friends buying it). Bottom line is, market cap should not prevent you from thinking clearly and checking other metrics of a Crypto.
Here’s a Quick Summary
The market cap of a Crypto is a quick way to measure the two most important things. First, how valuable a coin is at a given time. Second, how strong a coin is in terms of volatility.
If a significant return on your investment is what you’re looking for, stop looking at the prices of coins. Obviously, you want to know coins with a high market cap that are not likely to grow and look for coins with a low market cap instead. Focus on thinking about how high the market cap of Crypto can potentially grow.
Our advice is to always weigh market cap first and then check other metrics before making your final investment decision.
If you liked this article and found the content valuable, there are plenty more insightful and easy reads for you to check out in our blog!
The CoinMetro Team