Crypto market cap is a simple and easy way of finding out how big a cryptocurrency is — and it can lead to smarter investment decisions.
Figuring out a crypto market capitalization is easy. All you need to do is multiply a coin’s price by the total number in circulation.
Let’s imagine that a coin is currently worth $100, and it has a circulating supply of 20 million. Multiplying the two shows us what the crypto market cap is — in this case, $2 billion.
While in theory, it is easy to do these multiplications, things become much more difficult with different types of coins issuance, etc. — for example, crypto Twitter blew up in August 2020 when people realized they couldn’t calculate the same total Ethereum supply twice.
The total market cap takes in market data from a range of cryptocurrencies, such as Bitcoin, Ethereum, XRP and EOS — to provide a fuller, real-time picture of how the crypto asset sector is performing.
Another important metric to keep an eye on, particularly with altcoins, is the total supply. Cryptocurrencies such as Bitcoin have limits on their circulating supply, meaning no more than 21 million coins will ever exist. Others have a much greater number of coins (like XRP, with a supply of 1 billion).
Coins with more total supply are usually priced much less expensively. Aside from the value of their blockchain technology, scarcity tends to be a driving factor in a cryptocurrency’s value.
When evaluating the vast array of cryptocurrencies out there, you should rely on its market cap rather than the price of each coin. It may be tempting to think Bitcoin Cash is better than XRP because of how each coin is worth hundreds of times more. But in actual fact, BCH has a much smaller market cap.
Circulating supply — which looks at the number of coins available to the public — isn’t the only method for calculating a crypto market cap. Alternatives include calculating the total supply (factoring in assets that might be locked up or reserved).
Another is maximum supply. Here, market cap is calculated by multiplying an altcoin’s price by the maximum number of coins that could ever exist. (This can be hard to do. Not only would a higher circulating supply likely affect the price of cryptocurrencies, but some altcoins have no upper limit.)
Large-Cap vs Mid-Cap vs Small-Cap
So, what is the point of ranking by market cap? What are we learning from this metric?
It shows us how much risk we are dealing with when we select a coin to invest in. Cryptocurrencies can be broadly classified into “large-cap”, “mid-cap” and “small-cap”.
- Large-cap cryptocurrencies have a big market capitalization and as such are safe investments to make. Companies with more than $10 billion market cap are classified large-cap companies. Bitcoin, Ripple, and Ethereum classify as large-cap cryptos.
- Mid-cap cryptocurrencies have a smaller market capitalization but more risk than large-cap cryptos. Cryptos with market caps between $1 billion and $10 billion market cap are mid-cap.
- Small-cap cryptocurrencies have the smallest market cap and the highest risk because the chances of failure are much higher. Companies with market cap below $1 billion are small-cap.
The market cap gives you a good idea about the growth potential of the crypto.
If you decide to invest in large-cap cryptocurrency, then your investment will mostly not experience any major growth. It will be a “safe” investment and a lesser volatile investment. So, while you may not be making any major gains, your investment may still have some slight conservative growth.
Keep in mind, cryptocurrencies are a lot more volatile than traditional stocks. So, large-cap cryptos may still have a bigger scope of growth than large-cap shares.
Now, mid-cap cryptos have a lower market-cap than large-cap. They have a lot more growth potential than large-caps, which is also why they are riskier. The reason why they have more growth potential is that they may still be in the stage of increasing their market or utility. As such, these aren’t anywhere near their full potential.
Because of their low market capitalization, these cryptos are susceptible to the whims of the market. In other words, you may see your investment in them go down to a negligible amount in an instant.
So, the question arises, why should you invest in them in the first place?
Well, because they have the potential to truly explode in value and give you massive returns on your investment, much more than what large-cap or mid-cap cryptos can give you. One of your main challenges as an investor is to thoroughly research everything and then choose a cryptocurrency.
Select the right combination
How exactly should you invest your money in cryptocurrencies? So, we have three classes of cryptos: large-cap, mid-cap, and small-cap. These classes may not experience growth at the same time. Meaning, your mid-cap cryptos may grow at a time when your large-cap cryptos are dropping. Hence, it makes sense to have a portfolio which is diversified and has a good combination of all the three classes.
The advantage of a diversified portfolio is as follows:
- Risk reduction: A diversified portfolio which includes all the three classes will work in tandem to reduce your risk.
- Best of all worlds: You will benefit from all the advantages of owning assets in all the classes.
However, keep in mind though that even if diversification does reduce risk, it doesn’t eliminate it completely.
Stock market cap vs Cryptocurrency market cap
The term market cap originally comes from the stock market. To understand how differently market cap works for stocks and crypto, you need to have a basic understanding of how stocks work. Here is a simple overview.
Owning stock in a company will give you a share of its ownership. Ownership generally means two things:
- Having the right to a portion of the company’s future income distributed in the form of dividends.
- Receive a proportionate amount of proceeds in case the company is sold
The total value of all the shares is the market capitalization of the company. The company’s market cap is an estimate of its current ability to produce revenue and its potential for growth. A notable percentage of a company’s stock is held by the founders and other big shareholders.
Now, in the case of cryptocurrencies, a large portion of the tokens is held by the company behind the project and by whales who just eat up the tokens and keep them dormant in their wallets.
So, how are these two approaches different?
Remember, most of these stocks pay dividends. So, the stocks that the owners will have will earn them dividends, which in turn is going to dilute the stocks owned by the other shareholders. However, this is not the case with cryptocurrencies. When a whale hoards up tokens in their wallets, it just lies there. There are so many stories about folks having hundreds of bitcoins in their pen drive and then completely forgetting about it.
So why is this a problem?
If a large portion of the supply is locked up, then this seriously affects the liquidity of cryptocurrency and the coins get spent more often. Let’s do a thought experiment.
Suppose there is a hypothetical crypto called A Coin which has a total supply of 100 million coins. Now, imagine that some whales have purchased and stored away 50 million A coins. So, now we only have 50 million coins available for trading. Imagine that A Coin really goes off and people start trading more and more, they will only have 50 million coins to trade with instead of 100 million. As such, those 50 million coins are going to be spent more often.
Bitcoin is the perfect example of this. According to this article, 9.4% of the Bitcoin circulating right now is locked up inside 100 dormant wallets. Ok, so why is this a problem?
Overspending results in high token velocity. Token velocity increases when people are selling off their tokens at a faster rate. High token velocity means low network value. Since these tokens have low liquidation, the velocity invariable rises.
Let’s quantify token velocity (TV):
TV = Total Trading Volume / Average Network Value.
So, more the trading volume aka more that coin is traded more the velocity. Therefore, less the network value, more the velocity.
So, what does this have to do with market cap?
What all this means is that market cap may not be the best way to judge the value of a cryptocurrency. Like we have stated above, there is a critical difference between the market cap for stocks and the market cap for cryptocurrencies.
In the case of stocks, the total number of shares available is a far more accurate figure and it truly defines the distribution of a company’s ownership. In that case, the market cap is an accurate metric.
However, in cryptocurrencies, just by knowing the marketcap, we can’t make an accurate judgment about the company’s value. We don’t know how many of coins are just locked up in dormant wallets and what is the true velocity of these tokens. Without all these metrics, market cap is not really the best way to judge the actual value of a cryptocurrency.
Cryptocurrency Market cap: Conclusion
While market cap is a good metric to guess how valuable a cryptocurrency is, there are several other factors that one must take into account. If you are going to invest then please keep in mind that market cap is just one of the many tools you need. You should thoroughly research the projects that you are interested in and ask around to get a complete knowledge of their growth potential. Knowing their market capitalization will only get you so far.