What is Cryptocurrency Market Cap, and Why Does It Matter?

What is Cryptocurrency Market Cap, and Why does it matter?

Market cap, or market capitalization in cryptocurrency, is calculated after multiplying the crypto’s current price and its circulating supply. It determines the value and importance of cryptocurrency where high market cap cryptos are perceived as more valuable apart from determining investment opportunity. Market cap calculation acts like an investment tool and proves very helpful for investors who want to know about the digital coin’s actual market value. While stock market investors utilize share market cap to determine the market position of the company issuing the shares, crypto market cap acts more like an indicator to compare crypto value and determine its potential growth.

3 types of crypto market cap

Large Cap

Large-cap cryptos include popular coins such as bitcoin, Ripple, Ethereum and Cardano. These coins are mostly discussed amongst social media communities and are regarded as traditional crypto finance centres. A large-cap coin is like a celebrity coin with a unique name whose price movement is closely watched, especially during any change in the project. Even though the market remains highly volatile, investors classify large-cap cryptos as low-risk coins since they have reflected sustainable liquidity and growth over time. They also plummet less as compared to the other two market caps even though investors pull out their investment from the crypto market.

Medium Cap or Mid-cap

The medium cap comprises the greatest number of cryptocurrencies in the market and has high growth potential. Some of the popular mid-cap coin names include Axie Infinity, Polygon Matic, VeChain and Stellar Lumen. Although medium cap coins may seem comparatively a riskier choice to trade, many investors consider investing in them due to higher rewards with less investment.

Small Cap

Cryptocurrencies with small caps tend to attract newbies and media enthusiasts the most. Ones who seek to take a risky move to earn big usually like to invest in lucrative projects such as a small cap. These days, various small cap defi projects have sparked excitement in the crypto market as they have returned a huge amount of profits with minimal investment value. While small caps’ value seems to be very less compared to the other two, they attract investors due to project features and better offerings.

How is the crypto market calculated?

The cryptocurrency market cap can be calculated if the person knows about two pieces of information: the cryptocurrency’s current value or the amount at which it is sold and the number of coins available.

Crypto market cap = crypto value + circulating supply

Taking bitcoin as an example, the circulating supply of bitcoin is around 19 million bitcoin and its price hovers around 23,000 as of August 2022. So, we can calculate the market cap of bitcoin by multiplying 19 million coins by 23,000. This shows that the market cap of bitcoin is 437 billion.

Why does crypto market cap matter?

When evaluating a project’s genuine potential and worth in the cryptocurrency market, the price alone might be a deceptive signal. Even Bitcoin, the cryptocurrency with the greatest market capitalization, can see significant price swings due to things like public excitement, rapid changes in the available supply, or even a crypto prohibition in some nations. Such occurrences frequently have an effect on the overall image of a cryptocurrency’s eventual potential.

The overall supply and value of a cryptocurrency or token are what investors are looking for. Crypto market cap is used by savvy investors as a key indicator that helps them in comparing cryptocurrency worth and its potential growth. The high market cap coins usually indicate that investors are willing to pay more for the coin.

Investing terms such as fully diluted supply or FDV are further used when referring to the total crypto supply. An FDV cap is mostly calculated according to the coin value but not its circulation. One reason why bitcoin continues to perform well in the crypto space is that it is fully diluted supply is capped at 21 million coins. This means, that only 2 million coins can be mined more as the total number of bitcoins supplied in the market has reached 19 million out of a total of 21 million coins. Therefore, assessing FDV while calculating total supply also becomes essential as it allows investors to analyse the macro picture for making an informed investment decision.

Significance of crypto market cap for the investors

When we look into the company’s market capitalization in the stock market, we find either they have a small, medium or large cap. This ensures which investment opportunity is better according to the groups assigned. So, the market cap helps in referring to how much the company is worth and its value can further determine investment risk in the company. As a general rule, large-cap companies are considered less risky but they grow slowly as compared to small or medium-cap stocks.

Cryptocurrency follows a different approach and assessing the crypto market cap can impact investor investing decisions but not like stock market cap-related ones. In reality, the crypto market cap does not essentially determine the potential or scope behind a certain token rather it helps in comparing different tokens’ market supply as compared to popular tokens such as bitcoin and Ethereum. But then, with a strong market cap, investors can diversify their portfolio accordingly by keeping the three caps in their portfolio. While large-cap coins act risk-free but are slower in growth, small and medium-cap coins provide great returns but prove somewhat risky.

How does market cap determine price volatility?

One of the most traded coins i.e., bitcoin is the only coin that is not related to any organization, founder or particular business. It was developed by an anonymous Satoshi Nakamoto but no one knows anything about it. This means we have many things to analyse in other cryptos before investing. For instance, the co-founder of Ethereum’s views or upgrades made to his founded token may influence the coin market cap. Even coins worth less than three billion dollars are subject to high volatility and their price swings in the market constantly due to fear or excitement among investors.

Final words

A Crypto market cap is one of the most useful tools to analyze a coin’s worth. It helps investors in finding the growth potential and value of digital assets and whether the project is worth investing in or not. Yet, it is significant to know that the market cap may lack legitimacy levels concerning cryptocurrency. It must be used only to analyze the project’s potential prospects or to roughly estimate the coin’s worth as compared to other digital assets.

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