Today we answer the question “What is Cryptocurrency Market Capitalization?” The term capitalization is not one that is new to most investors. They will always consider this metric before investing in a particular asset.
When we talk about the cryptocurrency market capitalization, we are simply referring to a metric that is used to determine the real value of the underlying cryptocurrency.
Whereas most people think that the price of given crypto represents its true value, there are other facts that need to be considered before they can even think of making an investment move.
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Thing is that prices are bound to be erratic. One day a commodity that costs $10 will be priced at $17. Does this mean that you will get a different experience paying $17 for this commodity? Let us take the example of an energy drink. Paying $10 or $17 will not give you a different experience, and the only truth of the matter is that you end up spending $7 more in one scenario.
This is the reason it is wise for anyone thinking about getting into cryptocurrency investment to consider the real value of the cryptos. As you are aware, the price of most altcoins, especially Bitcoin, is very erratic. The prices fall and rise in terms of thousands and dollars. Anyone who is not aware of the concept of market capitalization can easily be discouraged or encouraged by the trends and end up making a move that they regret later.
Calculating cryptocurrency market capitalization
Most stock analysts rely on this metric known as market capitalization to determine whether it is a wise decision to invest in a particular company’s stocks. It is no different for cryptocurrency investors. Whereas stocks investors determine the market cap of a company by multiplying the price of a single share with that of the total number of shares available, cryptocurrency investors determine the market cap of a given coin by multiplying the price of a given coin by the number of coins that are circulating in the market.
The market capitalization of a company= Price of one share X Number of shares available
The market capitalization of a crypto= Price of a crypto X Number of cryptos available on the market
Let us take for instance, a certain coin called “T-Coin” has 2500 coins in circulation, and every single coin is priced at $7. The market capitalization of T-coin is calculated as follows:
– Market cap= Price of crypto x Number of cryptos available on the market
– Market cap of T-coin = $7x 2500
We can also assume that there is another crypto or altcoin called “S-coin”. There are 1000 S-coins that are in circulation. Every s-coin is priced at $16. The market capitalization of S-coin is calculated as follows:
– Market cap= Price of crypto x Number of cryptos available on the market
– Market cap of S-coin= $16 x 1000
As you can see, despite the price of the S-coin being higher than that of T-coin, the overall value of T-coin is higher than that of S-coin. This is the reason why most investors will forego investing in a given company’s assets and invest in another’s.
The market cap is, therefore, a more solid measure of a company’s worth in comparison to the price of the individual tokens in its name.
Breaking down this information
By now, I know you are very eager to find out why we are even picking on this metric. “Why is it this important?” you might ask. To that effect, keep following through and you will get a better understanding as to why market capitalization is that crucial.
For starters, market capitalization is a true measure of the risk that every investor is dealing with when they chose to invest in a particular cryptocurrency. Risk as a characteristic of any asset plays a huge role in the determination of its viability. There are investors who are attracted to high-risk assets, others are attracted to medium risk assets and others cannot deal with assets that are not low risk.
The same idea is applied to the market capitalization of cryptocurrencies, where we have Large-cap cryptos, mid-cap cryptos, and small-cap cryptos. What does each mean? Let us dive straight into that:
– Large-cap cryptos are essentially those that have a very big market capitalization and are due to this termed as a safe investment. On the overall, all firms that have a market cap that is bigger than $10 billion are perceived as large-cap firms. As of now, the only crypto companies that would fit into this category are Bitcoin, Ripple, and Ethereum.
– Mid-cap cryptos, as the name suggests, have a market cap that is smaller, but they bear more risk in comparison to the large-cap cryptocurrencies. All cryptocurrencies that have a market cap that lies between $1 billion and $10 billion are considered to be mid-cap.
– Small-cap cryptocurrencies are those that have the smallest market cap in the pool. They also bear the largest risk. Any company that has a market cap of less than $1 billion is small-cap.
What does this tell you?
This is essentially a good approach to determine the risk vs reward profile of the asset you choose.
Currently, Bitcoin has the largest market capitalization. There now. This number changes after an estimated 10 minutes, whereupon new blocks are mined. As of October 25, 2019, the price of 1BTC is $7466.48. The market cap of Bitcoin can, therefore, be calculated as follows:
– Market cap= Price of coin x Number of coins in the market
– Bitcoin market cap= $7466.48 x 17, 991, 125
If you look at the small-cap cryptos that are available in the market, their market capitalization is around 2000 times less than that of Bitcoin.
Now, as much as you may buy the small-cap coins at a lower price than the large-cap ones, the value of your investment is much less than what you would get if you purchased the large-cap cryptos.
One thing to note, however, is that the small-cap cryptos have a greater potential to grow. If you do not have the financial capacity to invest in Bitcoin, you can come up with a combination of small-cap cryptos whose value will be bigger than or equal to that of Bitcoin.
We can expound on this further by looking at the characteristics borne by large-cap, mid-cap and small-cap cryptos.
– These cryptos are not likely to experience major growth
– Generally considered a safe investment
– Perceived as the lesser volatile
– Even when you are making major gains, the investment may still be perceived as having conservative growth.
– These cryptos have a higher growth potential than that of large-cap cryptos.
– They carry more risks than large-cap cryptos do.
– Their growth potential arises from the fact that they are still experiencing an increase in utility.
– They are not close to experiencing their full potential.
– These ones have the highest growth potential.
– Their value may also go down to a value that is extremely low.
– They, to a great extent, bear the potential to give you the highest returns.
As of now, I hope you have seen why it is crucial to come up with the right combination of all these alt-coins. You can decide to select coins from each of the three categories or to make your own combinations.
You can, for instance, decide to combine small-cap and medium-cap, medium-cap and large-cap, or large-cap and small-cap. At the end of the day, your main focus should be to get as much value as possible.
This way, whenever the market forces align and the prices begin rising, you can get maximum returns on your investment.
Point of emphasis: choosing the right combination of cryptos
As we have already seen, there are three classes of cryptos, based on their market capitalization. The small-cap, mid-cap, and large-cap cryptos may not experience the same rate of growth. You may actually find that the cryptos you choose may experience different price trajectories within the same period. This, therefore, means that you have no option but to diversify your cryptos.
With a well-diversified portfolio, you will have reduced your risks significantly, and you will be in a position to experience the best of what all crypto worlds have to offer.
Watch out for Market manipulation
Another term that you will also hear a lot when the subject of market capitalization is brought up is market manipulation. Essentially, the small-cap companies usually try to manipulate the prices of their assets more readily than the large-cap companies do.
There are bad actors who will try to come in and control a significant quantity of cryptos to force the movement of prices in a certain direction.
What does market capitalization not reveal?
We have established that relying on the information about the market capitalization of a certain cryptocurrency to determine if you will invest in it or not is a better approach in comparison to relying on the price.
One thing that you should note, however, is that the market capitalization does not reveal any information related to the direction that the prices of a certain cryptocurrency would take in the future. Even the large-cap cryptos are not stable enough for the investment analysts to determine the direction their prices will take based on their current market capitalization alone.
You also do not get any information about the nature of the supply of the cryptocurrency involved.
With some cryptos, as you will learn, the market capitalization factors the total supply of the coins in the market, while in others; there is an infinite supply of the coins. In the case where the total supply of the coins is revealed, it is easy for investors to keep track of the value of their investment based on price variations only. This is because the supply of the coins remains fixed.
It is clear at this point that market capitalization on its own is not sufficient to tell you whether to invest in certain crypto or not.
The truth is that it does not reveal the direction that the cryptos will take and whether there will be instant or slow growth.
What next for you?
Having understood that the cryptocurrency market capitalization is simply a reflection of the number of coins circulating in the market, you should be more open to relying on other factors to determine your readiness to invest in a given crypto asset.
The three main cryptos, Bitcoin, Ethereum and Ripple have been experiencing significant price changes in the last half-decade. Their market capitalization has due to this reason increased significantly.
With Bitcoin, for instance, the total number of coins in supply is controlled. If you are to determine whether to invest in Bitcoin or not based on the price fluctuations alone, you would be missing out on the bigger picture. The price alone is sufficient to cause pandemonium and confusion, as investors try to cash put their Bitcoin to avoid making losses.
Today, the market capitalization of Bitcoin is way higher than that of most economic giants that were founded way before Satoshi created this crypto. Nevertheless, just like with stocks, the growth in the market cap over a given period is accompanied by the growth in the value of the overall value of the investors’ assets. This is usually regardless of the fluctuations experienced in the prices of the underlying company’s stocks.
The truth is that an analysis of the market cap of such a cryptocurrency is a quick way to determine the value of the coin. If the market cap is excellent, then the same characteristic is borne by the coin. Weighing the market capitalization may not be the only metric that you can consider to make your investment decision, but is most certainly one that tells volumes about the asset in question.
An analysis of the market cap of cryptos on an annual basis will help you see that their overall value is growing, and this is a better approach to follow instead of merely looking at the price fluctuations.
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I hope you found this article to be helpful and that you now have a better understanding of what Cryptocurrency Market Capitalization is. Please, if you got any questions then leave them below as I would be more than happy to answer them!
I wish you success!
founder of Gold Retired