Just like stocks, knowing the market cap of a cryptocurrency before you invest is imperative. Market cap has proven to be one of the important features an investor should look at before buying the shares of a company. So how does the market cap affect crypto? What is the relation between a cryptocurrency’s market cap and its potential to rise or go down in value?
What is market cap?
The word market capitalisation is originally derived from stocks. Market capitalisation can be defined as the total value of all the shares of a company. Just like companies, cryptocurrency also deals with market capitalisation. Crypto capitalisation is the total value of all the coins that have been mined. In crypto, the market cap of a currency is calculated by multiplying the total amount of coins that have been mined and the value of a single coin at any given time.
Just like company stocks, the higher the market capitalisation of a cryptocurrency the higher the confidence that a coin will survive deep in the market. In simple terms, the bigger a ship, the higher the probability of it surviving a storm.
There are various kinds of crypto capitalisation. There is the mega cap, the large cap, the medium cap, the small and the micro. Coinmarketcap at the moment is the most popular site to keep track of crypto capitalisation. It also offers relevant cryptocurrency financial metrics.
Just like with stocks, cryptocurrencies with a mega cap are considered to be safe investments. These are coins with more than a $200 billion market cap. These coins are considered to be less volatile and investment in such coins are seen as being conservative. It is important to note that despite the meaning shared in market capitalisation between stocks and cryptocurrencies, cryptocurrencies are more volatile than stocks. An example of such coin is Bitcoin with a crypto capitalisation of $1.117 trillion.
Cryptocurrencies with a large cap are coins with a market valuation of more than $10 billion. They are also regarded as safe investments and seen as one of the juggernauts in the cryptocurrency space. An example of such is Ethereum. They are also less volatile than other cryptocurrencies.
Cryptocurrencies with a medium cap are coins with a market valuation between $2 billion and $10 billion. These coins are more volatile than mega and large cap coins and tend to give more profits to investors in a short space of time. This is because these coins, unlike mega and large cap coins, still have a lot of room to grow as they are still in their early stages.
Small and micro cap coins are the most volatile and likely to have a crash. These coins are considered a highly risky investment, albeit sometimes with a lot of potential (short-term) growth. Small cap coins have a valuation between $300 million and $2 billion dollars. Micro cap coins have a valuation between $50 million and $300 million.
In general, the higher the market cap, the higher the dominance of the coin. Bitcoin has the highest dominance in crypto with a market capital of $1.117 trillion.
Calculation of Crypto market cap
The market cap of a coin is calculated using this formula:
Market cap = Total Circulating Supply x Price of each coin.
In summary, it is a result of the total coin in circulation and the price of each coin.
If “X Coin” has 400,000 coins in circulation and each coin is worth $1, the A Coin’s market cap will be 400,000 x$1 = $400,000.
Similarly, if “Y Coin” is worth $2 and has 50,000 coins in circulation, its market cap will be 50,000 x $2 = $100,000.
This example shows why market cap is a better indicator of a company’s worth than the price of its single token
The importance of crypto capitalisation
Crypto capitalisation shows the amount of risk we will have to deal with a coin when it comes to investment. Just as it has been stated above, there are different kinds of crypto caps. Mega and large caps are considered to be safe crypto investments because of their low volatility. Studying the capitalisation of such coins and investing in them means that the probability of losing your capital is low due to its low volatility. This also means that there won’t be much gain. Mega and large-cap cryptos may still have a larger scope of growth than mega and large-cap shares. Crypto capitalisation has made it possible for investors to know the right coins to invest in.
The importance of crypto capitalisation cannot be overemphasised. The study of crypto market cap prevents investors from putting too much capital in small market cap coins which unlike the mega and large market cap coins are highly volatile. The high volatility of these coins of course means that there is a possibility of huge gains, but this also means the possibility of having a huge loss also.
Crypto capitalisation also helps in knowing how to diversify your portfolio. Knowing that the lower a coin's capitalisation is, the higher the volatility. This helps investors in picking coins of various crypto caps. It is however important to know that despite the key information obtained from crypto capitalisation, the risk associated with investing in crypto is not totally eliminated.
In conclusion, the crypto market cap is a huge factor to be considered and studied when planning to invest in a coin. Despite this, there are other factors that should be considered before investing in any coin. The project that the coin is based on, the team working on that project, the long term plan of the team and a few other factors should be considered before investing in any coin. The past experience of that coin should also be studied.