Market capitalization is often used as its short form, i.e market cap, which refers to the overall value of a company’s share or stocks in dollars. In the case of cryptocurrencies, like Bitcoin, the market cap is evaluated by the value of all the coins that have been mined so far. Cryptocurrency market cap is calculated by multiplying the total number of coins that have been mined by the per coin price of crypto at a certain point in time.
You can look at market capitalization as a measure to assess the stability of an asset in the future. Do remember here that Bitcoin’s market cap is the largest and yet it witnesses volatility from time to time. However, just like a mountain that stands tall before a storm, if a cryptocurrency has a larger market cap, it is more likely to be in a better position to withstand market fluctuations. Crypto with a smaller market on the other hand would be unstable and thus is less likely to be a good investment. At the other end of this spectrum are digital currencies that have small market caps. They respond more dramatically to market moves, gaining or falling rapidly in value.
Importance of market cap
A cryptocurrency’s value can be measured in many ways and price is just one of the metrics. Market cap is often used by investors to get the full picture and analyze the value of various cryptocurrencies. It is an important metric that could imply the possible growth of a cryptocurrency and indicate whether it would be a good buy.
Several cryptocurrencies’ market caps could get impacted by their volatile nature. Let’s understand this by looking at a hypothetical scenario:
- Cryptocurrency A’s market cap stands at $400,000 since its per coin value is $1 and there are 400,000 of them in circulation.
- For 200,000 coins in circulation of cryptocurrency B, the market cap is worth $200,000 as each coin is worth $2.
- So, while a crypto B token has more value than a crypto A token, the overall value of the latter is more.
Market cap calculation
A cryptocurrency’s market cap can be measured as follows:
Market Cap = Current Price X Total Circulating Supply
Market cap categories
With a market cap, you can weigh the overall value of one cryptocurrency against another. This would in turn help you make better investment decisions. On the basis of their market cap, cryptocurrencies can be largely divided into three categories:
- Bitcoin and Ethereum which fall under the broader category of large-cap cryptocurrencies have a market cap that goes well over $10 billion. They are believed to be low-risk investments as they have a good overall record and are much more liquid. Read more about what is blockchain technology
- Mid-cap cryptocurrencies’ market cap usually stays within $1 billion and $10 billion. While it is said that they have a lot of potential, it is safe to say that they also come with a considerable risk that needs to be taken into account.
- Small-cap cryptocurrencies as the name itself might indicate have a market size that is as little as less than $1 billion. Needless to mention, they’re extremely risky and are more prone to shifts in market moods.