What is the crypto market cap? Why is it important?

In the cryptocurrency industry, market capitalization, or market cap, is a method for determining the size and popularity of cryptocurrencies and their current market value. The formula for determining a cryptocurrency circulating market cap is as follows:

Let’s use the world’s most popular cryptocurrency as an illustration to better understand this formula: 

circulating market cap = current price x circulating supply BTC, or Bitcoin We must divide the current price of Bitcoin by the number of coins in circulation to determine its market cap. At the time of writing, one bitcoin is worth $21,450, and there are 19 million of them in circulation, so the market cap would be:

$21,450 x 19,125,843 = $410,249,332,350 or $410 billion

There is more to market cap than meets the eye. We need to dig a little deeper in order to comprehend the applications of market cap and its impact on investors, particularly in the cryptosphere.

Last updated

November 29, 2022

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How and why to use market capHow market caps change?Why is market cap important?Crypto classification based on market cap LiquidityMarket cap that has been fully diluted

Market cap: how and why to use it

Many think that the main cost decides a digital currency’s worth, yet it’s really the market cap that lays out the total picture and addresses the genuine worth of cryptographic forms of money. It’s a crucial metric that can show how a cryptocurrency is doing in comparison to other crypto assets and how it’s growing.

Let’s look at an example to better comprehend this. Take a look at the following scenario: There are two cryptocurrencies: A and B. Cryptocurrency A has 500,000 coins in circulation, each of which costs $2. Using the aforementioned formula, we have:

Now, let’s say cryptocurrency B has a circulating supply of 150,000 coins and each coin is worth $5. Its market cap is equal to $1 million. That is $3 more than one cryptocurrency A coin’s price. Find the market cap now.

As can be seen, despite the fact that a single cryptocurrency B coin is worth more than a single cryptocurrency A coin, its market cap still falls below cryptocurrency A’s total market cap.

Consequently, the formula for calculating a cryptocurrency’s market cap is useful for determining its total global value. Nonetheless, it is essential to take into account the cryptocurrencies’ volatile nature, which means that their prices can dramatically fluctuate in response to market conditions and other factors.

How do market caps shift over time?

The supply and price of a cryptocurrency are typically the two primary factors that have an impact on its market cap. We should perceive how:

Supply: The price of a cryptocurrency on the market and its market cap as a whole can be affected by the number of coins in circulation worldwide. For instance, the maximum number of Bitcoin coins that can exist is 21 million. Bitcoin’s enigmatic creator, Satoshi Nakamoto, incorporated a code into its protocol to ensure that no more bitcoins are mined after 21 million coins are in circulation worldwide.

This restricts how much Bitcoin to exist, making it incredibly significant. Indeed, even resources like gold don’t have a proper sum; It is unknown exactly how much gold is on Earth and how much can be mined and extracted from it. Bitcoin, on the other hand, is a known, fixed amount. Because of its limited availability, its value rises.

Price

As we saw in the previous section, a cryptocurrency’s market cap can be significantly influenced by its price. If the price of each coin is high, a cryptocurrency’s market cap will rise even if there are only a few coins in circulation worldwide.

If, for instance, cryptocurrency X has 100,000 coins in circulation worldwide and each coin has a value of $10,000, its total market capitalization will be $1,000,000,000, or $1 billion (10,000 x 100,000). Initially, the circulating supply may appear to be low, but the cryptocurrency’s high price results in a large market cap.

On the other hand, in the event that a cryptographic money has an immense measure of coins in worldwide flow however each coin’s valuation is low, it might not have an enormous market cap. For instance, the total market capitalization of cryptocurrency Y will be $25,000 (0.00005 x 500,000,000) if there are 500,000,000 coins in circulation and each coin is only worth $0.00005.

Due to abundant supply, several meme coins like Shiba Inu and Dogecoin have extremely low prices. Because there are fewer of them available, some, like Bitcoin, have higher unit prices. Truly, cryptos are especially detachable, meaning you can purchase 1/10,000th of a Bitcoin, so the cost per coin itself doesn’t make any difference so much.

Why is market cap important?

We can learn a lot about any given cryptocurrency by looking at its market cap. It demonstrates the global perception of a particular cryptocurrency and its dominance over its rivals. The price and global circulation of cryptocurrencies and tokens influence market cap.

Because they are regarded as more appealing than other cryptocurrencies, cryptocurrencies with larger market caps frequently attract more investors. Market cap is therefore frequently used to rank cryptocurrencies. The price of a cryptocurrency alone is not sufficient to determine its market position. However, market cap is a more precise metric.

Market trends and patterns can also be reflected in market cap. For instance, if the price of a cryptocurrency that is linked to NFTs (non-fungible tokens) begins to fluctuate, this can be a sign that the cryptocurrency is attracting or losing investors.

Sorting of cryptocurrencies by market cap

Cryptographic forms of money are bifurcated into four primary classes in view of their market cap:

Mega-cap

There are only two cryptocurrencies in Mega-cap: Ethereum (ETH) and Bitcoin BTC has a market capitalization of approximately $470 billion at the time of writing, while ETH has a market capitalization of approximately $230 billion.

Large-cap

The market capitalization of large-cap cryptocurrencies is greater than $10 billion. Due to their strong risk-reward record, they are regarded as low-risk investments. Tether (USDT), USD Coin (USDC), BNB, XRP, Cardano (ADA), Solana (SOL), and Polkadot (DOT) are a few examples of large-cap cryptocurrencies. Due to their capacity to maintain a relatively constant value, many large-cap cryptocurrencies are stablecoins.

Medium-cap

The market capitalization of cryptocurrencies in the medium-cap segment ranges from $1 billion to $10 billion. Due to their untapped potential, investors consider medium-cap cryptocurrencies to be high-risk, high-reward coins. At the time of writing, some of the most popular medium-cap cryptocurrencies are Shiba Inu (SHIB), Litecoin (LTC), Dogecoin (DOGE), and DAI.

Small-cap

Small-cap cryptocurrencies typically come with the highest risk levels. Their market capitalization is less than $1 billion. This category includes a lot of brand-new cryptocurrency projects like eCash (XEC), NEO, USDD, and Bitcoin Gold (BITG).

Liquidity

You might have heard the term “liquidity” when comparing various cryptocurrencies. It’s a typical money state that becomes thrown about, and understandably. Market cap and investors’ decisions to buy and sell coins can be significantly influenced by liquidity.

However, what is liquidity? An asset’s ability to be purchased or sold at its current market value is measured by this term. Regardless of a cryptocurrency’s price, crypto investors aim to buy and sell at a fair value. For instance, if you own a portion of a bitcoin and wish to exchange it for U.S. dollars, the seller must have sufficient demand to either make a profit or sell it at a fair exchange rate. As a result, higher liquidity is frequently preferable and typically equates to lower risk.

Fully diluted market cap

We’ve talked about cryptocurrencies’ market caps. We need to know the price of a single cryptocurrency and the number of coins in circulation worldwide to calculate its market cap.

However, what happens when all of a cryptocurrency’s supply is in use? This is called a fully diluted market cap.

Simply put, the metric that is used to figure out a cryptocurrency’s market cap when all of its coins enter global circulation is called a fully diluted market cap. Take for instance Bitcoin. 

Recollect the 21 million impediment? As a result, Bitcoin’s global circulation will be referred to as a fully diluted market cap when it reaches this level. If we somehow happened to place this into a recipe, expecting Bitcoin has every one of its coins available for use, we’d have:

The current price of Bitcoin multiplied by 21 million equals $24,450, which is equal to $513,450,000,000, or $513.45 billion.

Wrapping up

Let’s look at some of the most important takeaways:

The dominance, popularity, and value of a cryptocurrency on the market are all determined by its market cap. Use this easy formula to determine the market cap of a cryptocurrency:

Supply and price typically have an impact on a cryptocurrency’s market cap, which is equal to the current price divided by the circulating supply. A cryptocurrency’s value tends to rise when there is a limited supply. Even if there are fewer coins in circulation, a coin with a high price could still have a large market cap, and vice versa.

There are four main market cap categories for cryptocurrencies: large-cap, medium-cap, and small-cap stocks.

Before making an investment in cryptocurrencies, it is important to take into account liquidity as well as fully diluted market caps.

The crypto world is always moving and turbulent. Worldcoin is also available to assist prospective investors seeking up-to-date information on this side of the globe

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By Ramond

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