To start earning millions in the crypto market, you first need to understand it well. Going back to the basics is never a bad idea.
In this article, we'll explain what market capitalization is, how to calculate it, what it indicates, and how it helps investors.
Understanding market capitalization
Let's begin our exploration of the somewhat mysterious term: crypto market cap.
Definition and importance
Market capitalization of cryptocurrency (also known as total market value) is the total value of all units of that cryptocurrency currently in circulation. It's important to note that this refers not to the token supply—i.e., the maximum possible supply of tokens—but to the tokens currently in circulation. Simply put, market capitalization represents the amount you would get if you sold all assets at the market price.
Market cap is one of the key crypto valuation metrics in the digital assets market. Here's what it can reveal to a seasoned investor:
1. Size and dominance assessment. Market capitalization indicates the "size" of one cryptocurrency compared to other altcoins. The larger the market cap, the more robust and stable the digital asset is considered to be.
2. Sentiment indicator. Market cap can reflect the overall sentiment of investors towards a cryptocurrency. Increasing market cap can signal growing interest and demand, while a decline might suggest waning confidence.
How is market cap calculated?
Now that we understand its meaning, let's look at how to calculate market capitalization for any given asset.
The universal formula, which applies not just to cryptocurrencies but to any financial market, looks like this:
C = P × V
Here, C is the market capitalization, P is the current price of the coin or token, and V is the current circulating supply of these assets.
Let's try calculating the market capitalization using this formula with the leading digital asset in the market, Bitcoin (BTC). For this, we'll head over to one of the most popular aggregators, CoinMarketCap. By navigating to the Bitcoin page, we see:
CMC website
Multiplying the current circulating supply (19,714,425 BTC) by the current price ($64,936), we get a staggering figure: 1 280 175 901 800. This figure, in US dollars, is the current Bitcoin market cap.
The role of market cap in the crypto world
Now that we know what total market value is and how to calculate it (or simply look it up on a data aggregator site for the crypto market), what role does this metric play in the crypto ecosystem? Let's dive in and find out!
Assessing the value of cryptocurrencies
First and foremost, crypto market cap is a fundamental valuation metric. It's used to show investors the overall market value of the cryptocurrency they are interested in.
This metric also provides access to another useful tool—comparative analysis. This involves market ranking and market dominance: by comparing the market cap of a chosen cryptocurrency with others, investors can gauge the relative importance of the coin, understanding whether a particular cryptocurrency is undervalued or overvalued at any given time.
Market cap vs. other valuation metrics
Experienced investors have several other tools at their disposal that, alongside market cap, help paint a comprehensive picture of the current market status and the health of selected cryptocurrencies.
Network activity. This includes the number of transactions being made on the network, the number of active addresses, and other similar metrics. Together, these indicators show the level of network usage and overall demand for the cryptocurrency.
Interest indicator. This reflects the level of investor interest in the cryptocurrency. Depending on this indicator, one can predict what the asset's price might do in the future — a decline if market players tend to "exit" the project, stagnation if interest remains at a constant level without change, or growth if interest is high.
Dynamic analysis. This approach tracks all changes occurring within and around the project. It includes changes in market cap, price movements of the chosen cryptocurrency, as well as network activity and investor interest we've already discussed.
Market сap сategories in сryptocurrency
Fun fact: crypto market cap is also divided into categories. Knowing about these can help investors classify different crypto assets by their size, liquidity, and growth potential.
Large-Cap, Mid-Cap, and Small-Cap cryptos
There are three main types of digital assets according to their market capitalization: large-cap, mid-cap, and small-cap. Let's delve into how to distinguish one from another.
Large-Cap. These are the kings of the digital asset market, the cryptocurrencies with the highest market capitalisation. They usually occupy the top 10 spots by this metric and rarely lose their positions.
This category includes coins with a market cap of over $10 billion.
Top 10 cryptos by market cap as of the publication date of July 2, 2024. Source: CMC
Mid-Cap. As the name suggests, this includes those cryptocurrencies that sit in the middle of the list—below the undeniable leaders of the crypto market, but above the smaller projects.
To fall into this category, a cryptocurrency must have a market cap between $1 billion and $10 billion. Currently, mid-cap assets include market giants like Polkadot (DOT), Uniswap (UNI), and Litecoin (LTC).
Small-Cap. This category includes coins and tokens with the lowest market capitalization. These are typically very young crypto projects, tokens from projects that haven't gained substantial investor support, or those whose tokenomics lack real potential.
This category encompasses all other crypto projects with a market cap under $1 billion. Examples include the young token Ethena (ENA), the token of the popular NFT game Axie Infinity (AXS), and the controversially known Worldcoin (WLD).
What these categories indicate for investors
In fact, this economic indicator is very important for market players and helps them make more balanced and informed financial decisions—such as even structuring their investment strategy, which we'll discuss a bit later.
How market cap influences investment decisions
As mentioned earlier, experienced traders always consider the crypto market cap when developing or revising their investment strategies. This economic indicator helps assess two critical factors: the level of risk and the approach to diversification. Let's delve into these aspects.
Market cap and investment risk
This aspect was discussed in detail in the previous section. In short, the market capitalization of a chosen crypto asset directly influences the potential level of risk an investor takes on when deciding to invest in that particular cryptocurrency. The logic is as follows:
- Large-Cap Cryptos = Lesser Risks. These are more established and stable, offering lower risk.
- Mid-Cap Cryptos = Mild Risks. These provide a balance between stability and growth potential, posing moderate risk.
- Small-Cap Cryptos = Higher Risks. These are less stable and more volatile, carrying higher risk but also higher potential returns.
Market cap and portfolio diversification
Additionally, this financial indicator is an excellent tool when an investor considers diversifying their investment portfolio.
Diversification is an investment strategy that involves spreading investments across different assets. This helps investors reduce potential risks and increase potential returns.
For example, Large-Cap cryptocurrencies can serve as the foundation of a portfolio, held for long-term growth due to their stability and lower risk.
Meanwhile, Mid-Cap and Small-Cap coins can be useful financial instruments for investors aiming to realise profits in the shorter term. Since these assets are more volatile, investors choose them consciously to capitalise on short-term price movements.
In summary, considering market cap allows investors to tailor their portfolios according to their risk tolerance and investment horizon.
Future trends and market cap's role in crypto valuation
Calculating the market capitalization of cryptocurrencies is one of the simplest and most convenient ways to quickly gauge a project's popularity, investor confidence, and the stability of its coin's price.
As for predicting market movements using market cap, this remains a challenging task. Asset prices are influenced by numerous factors such as news, investor sentiment, and regulatory actions worldwide. Unfortunately, such aspects cannot yet be forecasted using total market value alone.
Looking ahead, one thing is certain: investors and traders will continue to use this indicator alongside other analytical tools. Together, they allow for more effective predictions of future movements in the unpredictable cryptocurrency market.
The significance of market cap for crypto investors
Market capitalization is a widely used and convenient economic and financial indicator that helps traders in the crypto market make more informed investment decisions.
The itez team hopes you found this article useful. To keep up with more interesting content, don’t forget to visit our blog regularly!
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This article is not investment advice or a recommendation to purchase any specific product or service. The financial transactions mentioned in the article are not a guide to action. It’s not intended to constitute a comprehensive statement of all possible risks. You should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.
