In the traditional finance market, investors use market capitalization as guides to measure a company’s stocks. A publicly-traded company’s market capitalization is synonymous with its value since it is calculated by multiplying the company’s total shares by the share price.
However, cryptocurrencies are not companies. And unlike stocks, digital tokens do not represent an ownership share of the venture — though both stocks and cryptocurrencies debut in the market through public offerings; initial public offering (IPO) for stocks and initial coin offering (ICO) for crypto.
The main objective of a market cap is to help size up how investors view the prospects of assets. This article will discuss what market capitalization in crypto is, how it works, and why it is the most important metrics in decentralized finance.
Defining Crypto Market Cap
Cryptocurrency market capitalization, or most commonly called crypto market cap, is the current market value of a cryptocurrency network. It’s calculated by multiplying the circulating supply of a crypto asset by the price of an individual unit.
So, let’s say we have two networks, AliceCoin and BobCoin. AliceCoin has a total supply of 1,000 coins, and they’re all circulating. BobCoin is a Proof of Work chain, where currently 60,000 out of a max supply of 100,000 coins are circulating. The current market price of AliceCoin is $100, while BobCoin is $2. Which coin has a bigger market cap?
Market cap = circulating supply × price
AliceCoin market cap = 1,000 × $100 = $100,000
BobCoin market cap = 60,000 × $2 = $120,000
Even though one BobCoin is 50 times cheaper than one AliceCoin, the value of the BobCoin network is still higher than the value of AliceCoin. This is why market capitalization is a better estimation of a network’s value than simply the price of an individual coin.
What is The Total Market Cap?
The total market cap takes in market data from a range of cryptocurrencies — including Bitcoin, Ethereum, XRP and EOS — to provide a fuller, real-time picture of how the crypto asset sector is performing. This metric is deemed important by many, as it indicates the size of the industry as a whole.
Another important metric to keep an eye on, especially with altcoins, is the total supply. Cryptocurrencies like 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 (example is XRP with a supply of 1 billion).
Coins with a larger 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. Case in point, BTC has an all-time high of $20,000, while Ripple’s record is just $3.84.
Classification of crypto assets using Market Cap
These classifications will make it easier for you to compare the total value of cryptocurrency with others, so you will be able to make better decisions for investment. Plus, this info will make reading a cryptocurrency chart a little easier.
Here are the four market capitalization classifications in cryptocurrency:
Large-cap cryptocurrencies
They refer to cryptocurrencies with huge market capitalizations and are commonly considered to be safe crypto investments. A cryptocurrency is considered a large-cap if its market cap is over 10 billion USD.
Additionally, large-cap cryptocurrencies also have higher liquidity, which attracts more investors than those with lower capitalizations. This means that you can find these assets almost in every digital asset trading platform. The top cryptocurrencies in this category are Bitcoin and Ethereum (ETH).
Mid-cap cryptocurrencies
These cryptocurrencies have a market capitalization of 1–10 billion USD. Currencies categorized as mid-cap are generally considered to have untapped profit potential but are higher-risk assets. In general, mid-cap cryptocurrencies tend to show good performance in the long term. By having it in your portfolio, mid-cap currencies can increase your asset diversification.
However, not all mid-cap coins have the potential to turn into large-cap assets. Examples of these currencies include Litecoin, Cardano, and Monero.
Small-cap cryptocurrencies
Coins and tokens belonging to the small-cap cryptocurrencies are currencies with a market cap of around 100 million — 1 billion USD. Cryptocurrencies in this category are very volatile and considered high-risk investments, even though they have the potential to grow in the short term. An example of the currencies in this category is Dogecoin.
Micro-cap assets
Micro-cap assets are considered to have the highest risk amongst the rest of the currencies. Generally, currencies belonging to this category are new coins launched by a group of people or anonymous groups with a market cap of less than 50 million USD.
Is Crypto Market Cap an Important Metric?
There’s a lot of debate about how much weight should be placed on the size of the cryptocurrency market. Some critics claim that it’s an unwelcome legacy of the stock market — leading to misguided investment decisions and contributing to substantial levels of fear and greed.
However, crypto market caps can also give us a fact-based look at how altcoins are performing — a much-needed source of objectivity away from social media.
Final Thoughts
Crypto market capitalization is one of the essential metrics to watch. It depicts the flow of the valuation of the entire cryptocurrency industry. It can also be useful to distinguish between what is being reported now, and what the diluted market cap can be further down the line.
At the same time, it’s important to consider other metrics as well. The market cap is merely one piece of the puzzle. There are other aspects of the industry to research before making any financial commitments.
