Day 16 of 100 | Crypto Basics | 5 min read
What is Market Capitalization in Crypto?
Master what is market capitalization in crypto? in this comprehensive lesson. Build your cryptocurrency knowledge step by step.
### Understanding How Cryptocurrencies Are Valued
Market capitalization, often shortened to market cap, is one of the most important metrics for evaluating cryptocurrencies. It tells you the total value of all coins in circulation and helps you compare different cryptocurrencies on an equal footing. Understanding market cap is essential for making informed investment decisions and avoiding common misconceptions that trap less knowledgeable investors.
### What Market Cap Actually Means
Market capitalization is calculated by multiplying the current price of a cryptocurrency by the total number of coins in circulation. This simple formula produces a number that represents the total market value of the entire cryptocurrency.
[EXAMPLE] If a cryptocurrency has 10 million coins in circulation and each coin is worth 5 dollars, the market cap is 50 million dollars. This number tells you that the market currently values the entire cryptocurrency at 50 million dollars.
The concept comes from traditional stock markets, where market cap is calculated by multiplying a company's share price by its total outstanding shares. In cryptocurrency, the logic is the same, though the underlying assets are quite different.
[TIP] When comparing cryptocurrencies, market cap is more meaningful than price. A coin priced at 0.01 dollars with a 10 billion dollar market cap is actually more valuable than a coin priced at 1000 dollars with a 500 million dollar market cap. Price alone tells you nothing about total value.
### Circulating, Total, and Max Supply
Understanding market cap requires understanding the different ways to measure supply.
Circulating supply is the number of coins that are currently available in the market. This includes all coins that have been mined or distributed and are not locked or reserved. Market cap is typically calculated using circulating supply.
Total supply includes all coins that have been created, whether or not they are in circulation. Some coins may be locked in vesting contracts, held by foundations, or otherwise restricted. Total supply is always greater than or equal to circulating supply.
Maximum supply is the total number of coins that will ever exist. Bitcoin, for example, has a maximum supply of 21 million coins. Some cryptocurrencies have no maximum supply and can create new coins indefinitely.
[WARNING] Be careful when evaluating cryptocurrencies with low circulating supply but high total or maximum supply. A project might have a low market cap now, but if billions of additional tokens are scheduled for release, the true future market cap could be much higher than current calculations suggest.
Fully diluted valuation multiplies the current price by the maximum supply, giving you a sense of what the market cap would be if all possible coins were in circulation. This metric helps you understand potential future dilution.
### Market Cap Categories
Cryptocurrencies are often grouped into categories based on their market cap. These categories help investors understand the general risk and opportunity profile of different assets.
Large-cap cryptocurrencies typically have market caps above 10 billion dollars. Bitcoin and Ethereum are the largest, with market caps in the hundreds of billions. These assets tend to be more stable and less risky than smaller alternatives. They have established track records, significant liquidity, and widespread recognition.
[KEY] Large-cap cryptocurrencies are often called blue chips, borrowing terminology from the stock market. They form the core holdings of most diversified cryptocurrency portfolios because of their relative stability and lower risk of total failure.
Mid-cap cryptocurrencies have market caps between roughly 1 billion and 10 billion dollars. These projects are established enough to have proven their concepts but still have significant growth potential. They carry more risk than large-caps but offer potentially higher returns.
Small-cap and micro-cap cryptocurrencies have market caps below 1 billion dollars, with micro-caps often below 100 million. These assets offer the highest potential returns but also the highest risk. Many will fail completely, but winners can produce returns of thousands of percent.
### What Market Cap Can and Cannot Tell You
Market cap is a useful tool, but understanding its limitations is crucial for using it correctly.
Market cap does not tell you how liquid a market is. A cryptocurrency might have a high market cap but very low trading volume, meaning that selling even a small amount could significantly move the price. Liquidity matters when you need to enter or exit positions.
[EXAMPLE] Imagine a cryptocurrency with a market cap of 1 billion dollars but only 100,000 dollars in daily trading volume. If you tried to sell a million dollars worth, you would likely crash the price because there are not enough buyers to absorb your order at current prices.
Market cap does not tell you about the quality of the project. A high market cap might indicate widespread adoption and genuine value, or it might indicate successful marketing and speculation. You need to evaluate the fundamentals separately.
Market cap can be manipulated in low-liquidity environments. By buying a small amount of an illiquid token at inflated prices, someone can artificially inflate the apparent market cap. This is why market cap should be considered alongside trading volume and other metrics.
### Using Market Cap for Investment Decisions
Smart investors use market cap as one tool among many for evaluating investment opportunities.
Comparing projects by market cap helps you understand relative valuations. If two projects in the same sector have similar fundamentals but one has a market cap five times higher than the other, you might want to understand why that difference exists.
[TIP] Look at market cap in the context of a project's metrics. A lending protocol with 10 billion dollars in deposits and a 1 billion dollar market cap is valued differently than one with 100 million in deposits and the same market cap. Metrics like users, revenue, and activity provide context for market cap comparisons.
Market cap trends over time tell you about market sentiment. A rising market cap indicates growing confidence and investment. A falling market cap suggests declining interest or confidence. These trends can inform timing decisions, though predicting short-term movements is notoriously difficult.
Portfolio allocation often takes market cap into account. Many investors allocate larger portions of their portfolio to higher-cap assets and smaller portions to higher-risk, lower-cap assets. This approach balances potential returns against risk.
### Market Cap in Perspective
While market cap is widely used, it is worth remembering that it represents market opinion, not intrinsic value. The market cap of any cryptocurrency can change dramatically based on sentiment, news, and broader market conditions.
During bull markets, market caps across the entire cryptocurrency space tend to increase, sometimes dramatically. During bear markets, they tend to decrease. Individual project market caps are influenced both by project-specific factors and these broader market dynamics.
[KEY] Market cap is a snapshot of current valuation, not a prediction of future value. A high market cap does not guarantee future success, and a low market cap does not guarantee future failure. Use it as one input among many in your investment analysis.
Understanding market cap helps you navigate the cryptocurrency market more effectively. It provides a common language for discussing and comparing cryptocurrencies, helps you understand the scale of different projects, and informs portfolio allocation decisions. Combined with other analytical tools, market cap is an essential part of any cryptocurrency investor's toolkit.
Knowledge Check
What is a key aspect of what is market capitalization in crypto??
- It's only for advanced users
- Understanding the fundamentals is essential for making informed decisions (Correct)
- It doesn't apply to cryptocurrency
- It requires expensive equipment
Explanation: Understanding the fundamentals of what is market capitalization in crypto? is essential for anyone participating in the cryptocurrency ecosystem. This knowledge helps you make better decisions and avoid common mistakes.