Crypto market cap or market capitalization is the combined value of all issued cryptocurrency coins. For example, imagine that there is a cryptocurrency that has 100 coins in circulation. Each coin costs $100. The market cap of this currency is $10,000.
Understanding the market cap will help you see the risk level and potential for value growth of a coin.
Let’s dive in and explore what market cap is and how to calculate it.
Now that you understand the crypto market cap definition, here is a simple formula for calculating the market capitalization of a coin.
Total Supply * price of one coin = market capitalization.
To understand how the cryptocurrency market cap formula works in practice, let’s take a look at an example. At the time of writing, the price of a single Bitcoin was $7202 and there were 18 097 425 Bitcoins in circulation.
18 097 425 * 7202 = 130 337 654 850. So, we can conclude that the market cap of Bitcoin at the time of writing amounted to 130 billion, 337 million USD.
Still, it’s good to know the formula because not all coins can be found on tracker apps and websites.
Traditional investors have access to many financial metrics for risk evaluation. For example, Earnings per Share and Price to Earnings ratio.
But when it comes to crypto, companies usually don’t disclose financial metrics. Or there isn’t even a centralized company that could share these details.
That’s why market capitalization plays the role of a major risk indicator. Investors use this metric to understand the maturity of a cryptocurrency.
The general rule is simple.
Coins with high market capitalization are more mature and have less headroom to grow.
Coins that have a very small market capitalization have the potential to skyrocket. Or they can devalue in a matter of days, leaving investors with nothing.
That is a game that cryptocurrency investors are willing to play.
Thankfully, there are guidelines that help investors classify the risk and growth potential based on market cap. You can use these guidelines in your own investment strategies.
All cryptos can be divided into three large categories. They are “large-cap”, “mid-cap” and “small-cap” cryptocurrencies. These categories show the level of risk when dealing with a certain coin. Let’s explore these categories in detail.
Each cryptocurrency category carries a different risk and reward potential. Let’s talk about it in detail.
Investing in a large-cap coin usually means that you are on the safe side. But you are also unlikely to make huge profits. The reason is simple. Coins like BTC or ETH are well-established and recognized. Many people hold and use thesу cryptocurrencies. Thus they are supported by large communities. Only a dramatic event can significantly affect the price of Bitcoin or Ethereum.
We don’t say that a big win is impossible in this case. All cryptos, including the major ones, are still rather volatile. It means even the leaders of the market have a good potential to grow and rise in price, compared to traditional assets. Just don’t expect them to skyrocket in an instant. On the plus side, this rule works in both directions. Large-cap coins are unlikely to devalue fast.
Mid-cap crypto assets are less stable, but at the same time, they have more room to grow. As always, bigger growth potential balances a higher level of risk. Mid-cap cryptocurrencies are less predictable because they are less mature than large-cap coins.
These coins have the support from their rather large communities. They have already proven their value to the industry. But they are not developed enough to say with certainty if a coin has a chance to become the market leader.
A small-cap cryptocurrency has a chance to become “the next Bitcoin”. Many even play with this idea in their marketing. But cryptocurrencies with small market capitalization can be killed overnight. It can even happen as a side effect of some major market fluctuation. But if they manage to survive and succeed, investors can gain thousands of percent of profit.
So, with so many options, where does that leave you as an investor? Do you play a risky game and potentially lose everything for a chance of a large profit? Or do you play it safe and stay satisfied with modest gains?
The right answer is — both. Successful investors diversify their portfolios. This means that it is best to apply the knowledge of market cap and buy coins of all sizes.
The proportion of large to mid to small-cap coins in your portfolio will depend on your personal risk tolerance. But, there are objective factors too.
For example, basing portfolio on high-risk currencies demands more time. If you are don’t have the time to follow the market news 24/7, opt for something more safe like BTC.
If you are looking to actively manage your portfolio, you can opt for riskier currencies. But be prepared to sell or buy coins at a moment’s notice. You will have to react to market changes as they happen. Also, investing in a small-cap coin requires a lot of research. You will have to analyze the white paper and the road map of each project.
Both strategies can be valuable as long as you understand how to approach them.
Now, let’s take a look at the five most popular investment choices. Here is a list of the top five cryptocurrencies by market capitalization.
BTC, the first cryptocurrency, is holding the leading position, and by a large margin. It has an impressive market capitalization of $131,064,791,951 (by mid-December 2019). The next block halving will take place around May 2020. It means the demand for BTC will exceed supply and the value of the coin will grow. This prediction is based on what we know about traditional financial assets behavior.
At the time of writing, the market capitalization of the second-popular cryptocurrency was $15,726,278,037. There is a big gap between the leader of the market and ETH. In 2020 Ethereum promises to switch from Proof-of-Work to Proof-of-Stake. It is an alternative way to validate transactions that should be less energy-consuming. This move can affect the price of ETH.
The market capitalization of XRP is about $9,500,000,000 at the time of writing. This cryptocurrency has been showing rather poor performance. XRP has lost 36% since Jan 2019. The loss might have a connection with the recent legal fights. The company was accused of selling unregistered securities during the ICO. Potentially, it means heavy penalties that could negatively influence the price of Ripple.
Tether (USDT) is a stable coin by Bitfinex. It’s a crypto version of the USD. Basically, it’s a token, which is backed by US dollars and can serve as its digital alternative. Tether is widely used on crypto exchanges, where trading pairs with USDT are rather popular. The main feature of USDT is its ability to keep a stable price while being decentralized and blockchain-based like a crypto.
Nevertheless, it would be wrong to think that the price of Tether is equal to the price of USD at all times. Currently, new stable coins appear on the market, like BUSD by Binance and DAI by MakerDAO. If they are successful, they can compete with Tether for the leadership in this niche.
Bitcoin Cash (BCH) is a fork of BTC. It is similar to the original Bitcoin (the same supply, encryption algorithm, and mining protocol). But if features some major improvements, like the increased block size.
The coin has been around for 2 years, but it has managed to become a popular investment tool and by now features a $3,803,493,773 market cap. The price of Bitcoin Cash is predicted to grow further in the future.
These were the giants of the cryptocurrency sector, holding the leading positions on the market. The number of smaller cryptos is huge — by the end of the summer of 2019 it was over 1,600 and it kept growing. A lot of assets to choose from if you decide to become a crypto investor.
Market capitalization is a very useful metric that helps us understand the value and potential of a coin.
The important thing to remember is that it’s not possible to understand everything about a cryptocurrency by having a look at its market cap. Especially when dealing with tokens. You should dig into the companies and people who stand behind this crypto. See the papers they publish. Reach out to the community for advice. Educate yourself and read the experts’ predictions. Finally, follow the market and understand how it works. Sometimes, the figures alone can be misleading.
We hope, you now have a basic understanding of what a market cap is and can use it as a tool.
Warning: this article is should not be considered investment advice. All cryptocurrency investments are risky. Investors should only operate with funds that they can lose. Invest based on your common sense and research.