Cryptocurrency investors tend to search for low-priced cryptocurrencies. But this is a mistake. Investing in cheaper coins means more potential for growth and return. In reality, coin prices reflect nothing about the coin’s actual value. They do not understand whether cryptocurrencies are underpriced or overvalued, cheap or expensive. The market cap answers that question.
The market capitalization of a cryptocurrency like Bitcoin represents the combined value of all its coins. A single coin’s value is determined by multiplying its number of circulating coins by its current market value. Bitcoin and other cryptocurrencies have a market capitalization (or market cap) that represents all of their currencies or shares. Calculating the market capitalization of cryptocurrencies involves multiplying the number of coins mined by the price of each coin at any given point in time.
A stock’s market capitalization can serve as a rough indication of its stability, especially concerning market growth. One of the most volatile cryptocurrencies, Bitcoin, has still shown volatility regardless of its market cap. While the market value of a cryptocurrency is no guarantee that it will be more stable during heavy weather than one with a smaller one, a cryptocurrency with a high market capitalization will be more likely to be. However, the smaller market caps make digital currencies more vulnerable to the whims of the market, which can lead to significant gains and dramatic losses.
A market cap might be called a circulating or fully diluted supply. The first one is the 17.54 million Bitcoins that mined (“circulating supply”), or the second is the 21 million that will be mined eventually (“full diluted supply”). Market capitalization can be measured using the circulating supply for some observers or the fully diluted supply for others.
How important is market capitalization?
In order to understand the value of a cryptocurrency, we must look at more than just the price. A market cap is a measure of how much a cryptocurrency has sold for and can serve as a guiding indicator to the value of a cryptocurrency. When looking at the growth potential of cryptocurrencies, it is possible to determine whether they are safe to purchase and whether there is a high chance of growth.
Here are two fictional cryptocurrencies that we can compare the market cap for demonstration.
- In the case of Cryptocurrency A, each coin is worth $1, and there are 400,000 coins in circulation; the market capitalization is $400,000.
- A coin worth $2 has 100,000 coins in circulation, so Cryptocurrency B’s market capitalization is $200,000.
- Cryptocurrency A’s value is double that of Cryptocurrency B despite the coin price being higher than that of Cryptocurrency A.
In addition, it’s important to remember that cryptocurrency’s market caps can swing since they are volatile.
What is the role of Market Cap?
Market capitalization should be the most important metric that investors pay attention to rather than other metrics. Based on this method, we can determine a coin’s prospects: we can decide if it has the potential to grow or if it is a very high-risk coin?
- Exhibits the value of crypto
The market capitalizations of similar blockchain projects can vary greatly, and they offer different values despite operating in the same field or solving the same problems. Cryptos can be categorized into three groups based on market capitalization size: large, medium, and small-cap. By comparing the market capitalization of different projects, we can make informed decisions.
- Risks or Growth Potential
There are different levels of risk and growth potential for market caps of various sizes. As a result, projects falling into specific market-cap categories are judged using the same standards.
- Large Cap
The top four cryptocurrencies by market capitalization are Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), and Cardano (ADA). Ripple (XRP) has a market capitalization of $50 billion, and this amount would rise to more than $100 billion if fully diluted. People will hear about these coins on mainstream media and traditional finance television networks.
If you think about it, any project that enters the territory of a large capitalization is a milestone in comparison to an asset with a relatively low capitalization.
The fact that large-cap cryptocurrencies are seen as lower-risk investments despite market volatility is largely due to the stable growth and liquidity of them. Moreover, even when investors pull out of the market, their value is less likely to plunge radically, which makes their investment less likely to suffer a loss.
Crypto investors who have been following the needs for a couple of years will acknowledge that not much can be said about crypto.
Large-cap companies are typically referred to as such because their market capitalization exceeds $10 billion. Typically, large-cap companies produce quality goods and services, pay reliable dividends, and have a steady growth. Several brands of theirs may appeal to a nationwide audience and maybe dominant players within established industries. Large-cap stocks’ growth potential is lower than that of small- and mid-cap stocks, so investing in them may be considered more conservative, potentially posing fewer risks.
- Medium Cap (Mid-cap)
Despite not hitting the $10 billion mark yet, these coins usually have a strong following. At the time of writing, Algorad (ALGO) was in the large-cap category. Even though investing in medium-sized projects can be risky, those who get in early may enjoy greater profits. As a result, purchasing BTC for $100 has passed. However, another example is that MANA still offers the opportunity to get in. As a result of the current attractive price (currently below $3) and a circulation supply of approximately 18 billion, its market cap is roughly $5 billion. Market capitalization is crucial when investors consider whether to invest in a medium cap project.
Mid-cap companies have an enterprise value between $2 billion and $10 billion, which is very typical for mid-cap companies. The companies in this category are generally based in industries where growth has been rapid or where rapid growth is probable in the near future. An organization that is at this stage of its evolution is likely to reach its full potential at some point. It can be argued that midcap stocks have the best balance between risk and return, as they are between large and small caps. An organization with a mid-cap size may have a greater chance of growing than one with a large one, and it may also be less risky than one with a small one.
- Small-Cap
As a general rule, cryptocurrencies with smaller market caps generate more buzz on the internet. An investment in small-cap crypto can be enticing to investors looking for risky projects that might be profitable in the long run. Most of the projects that are currently generating so much excitement in decentralized finance (DeFi) are still considered small caps.
The small-cap crypto space may have exciting new projects like Nord Finance (NORD), but most of these projects are still relatively new. Even as they continue to prove their worth as small caps, investors will start to see their features and offerings more clearly.
These are young companies servicing niche markets and emerging industries in most cases. United States companies fall into small, medium, and large categories. Small companies can be more susceptible to an economic or business downturn due to their limited resources. In addition, they may be vulnerable to the fierce competition and uncertainties typical of untested, burgeoning markets. Small-cap stocks, however, may present an attractive opportunity for long-term investors willing to endure short-term volatility in stock price fluctuations.
Diversify your portfolio by comparing coins
If you seek to make more informed investments by comparing the market capitalization of various coins, you can do so based on this information. In order to determine a coin’s growth potential and future risk, there is, in fact, a direct correlation between its size and its growth potential.
There are several different types of cryptocurrencies and the way they behave differs depending on the market conditions and the time of day. Having this metric on your side, you can add coins with varying market caps to your portfolio so that you’ll be able to keep your investment portfolio balanced. Adding diversification to a portfolio may reduce volatility and risk, leading to a greater return over the long run.
Do you know how to calculate the crypto market cap?
An analyst can use market capitalization to determine how well or poorly a company is doing. To calculate it, follow these steps:
Market Cap = Current Price x Circulating Supply
A coin’s current price is its market price during a particular time. Meanwhile, a circulating supply represents how many Bitcoins are currently available. Let’s talk about Bitcoin. The circulating supply is 1000 coins, and the price is currently $1000 per token. Hence, the current market cap stands at $1,000,000. By multiplying $1000 x 1000 coins, we get $1,000,000.
It Notes that a market cap indicator does not provide insight into an asset’s liquidity or cash flow. Numbers reflecting market capitalization reflect a company’s performance and presence on the market. Market capitalization will be severely affected by fluctuations in an asset’s value. The extreme volatility of the cryptocurrency market is pronounced in this regard, where billions of dollars worth of market capitalization can suddenly appear or disappear at any moment.
Recent price increases of Bitcoin have sent investors scrambling because of how high the cryptocurrency price has risen. It is also important to clarify that cryptocurrencies’ market capitalization and fiat currency investments shouldn’t be equated. The following reasons illustrate why:
- Investors in the market do not immediately purchase newly mined coins. A total market cap of $3000 is achieved by purchasing one coin at $10 when there are 300 coins in circulation, but only 10 cents have been invested. When new investors begin investing in cryptos, they usually make this mistake.
- It was mentioned above that there is a highly volatile market for cryptos in the section above. There can be many reasons behind that increase of 3000% in a crypto price, but that doesn’t necessarily mean this investment amount has increased 3000%. Market capitalization declines when cash on the market remains roughly the same or grows only slightly, and the value rises.
- The market capitalization isn’t a useful indicator of its actual value.
- In the case of Bitcoin, a price increase would increase market capitalization. Thus investors would liquidate assets to enjoy their gains. This sudden fall in demand and surge in supply would result in the prices of cryptos crashing.
Why is Crypto Market Cap Important for Investors?
By comparing companies’ market capitalizations, stock market analysts differentiate between different investment categories. The market cap is essential for investors since they may divide their investments among these groups for a variety of reasons. An evaluation of a company’s value is often determined by the value of its market cap, and the riskiness of investing in it can also be indicative of the value of the company. There are fewer risks associated with large-cap stocks, but they grow more slowly than mid-and small-cap stocks.
In contrast, cryptocurrency is still relatively new and has not yet been classified into the above categories based on the fact that this is such a new concept. Because most crypto experts recommend that you stick to Bitcoin and Ethereum and don’t invest more than 5% in crypto, following the market cap is less important. If you are interested in knowing the scope or potential of a particular token, knowing its market cap might be helpful, but do not let it influence your investment decisions as it would in stocks.
Jully Alma-Taveras, author of ‘Investing Latina’ on Instagram and personal finance expert, says users need to recognize that crypto is quite different from the stock market. It’s a different world.” That’s true, but there is one way you can potentially use market capitalization to guide Bitcoin and Ethereum investing.
Using the Crypto Weighted Market Cap Strategy
Jeremy Schneider, a personal finance expert at Personal Finance Club, says that the weighted market cap strategy is helpful for investors even if they invest only in Bitcoin and Ethereum. With weighted market cap investing, you allocate investment capital proportionally to the market capitalization of each asset. Bitcoin and Ethereum have market capitalizations of roughly $71 billion, and Ethereum has a market capitalization of $29.3 billion. Divide those percent values by the respective percentages, and you have approximately 71% Bitcoin and 29% Ethereum.
It’s easy to determine how to invest $100 in Bitcoin and Ethereum if you follow this method: You’d invest about $71 in each. Experts say you should not invest in altcoins (anything that isn’t Bitcoin). However, the same philosophy can be applied to almost anything you choose to put into your portfolio. You can divide the total investment amount into specific coins based on their market capitalization proportions. It means you’re investing less in other cryptocurrencies and more in Bitcoin and Ethereum, relatively safer.
Furthermore, crypto prices constantly fluctuate, so market capitalization is always changing. Because of this fluctuation and the possibility of the market dropping out entirely, experts recommend limiting any investment and only investing what you can afford to lose.
FAQS
- How do you interpret the market cap?
The market capitalization of an organization is calculated by comparing it with its open market value and reflecting what the market believes about its prospects. Market capitalization for large companies typically exceeds $10 billion.
- Do you prefer a high or low market cap?
In general, market capitalization reflects the business stage of a company. A large-cap stock investment will usually pose less risk than a small-cap stock or a midcap stock, thereby offering less aggressive growth potential.
- Which is the best volume to market capitalization ratio?
It is considered excellent when the ratio is at least 3.0. In crypto assets, the volume represents the sum of all spot trades reported during the past 24 hours by all exchanges.
- Does market cap equal valuation?
An equity’s market value can be thought of as its market capitalization. Depending on the precise metrics and multiples used by the analyst, market valuation can vary.
- Does market capitalization include debt?
A company’s market capitalization ignores some critical facts when determining its overall value, and debt is the most vital factor excluded.
Conclusion
Market cap is an investment tool that can be extremely useful. To succeed in the crypto world, one must use data, just as any other investing endeavor. Especially when it comes to cryptocurrency, emotional decisions can be very tempting. The media give Bitcoin and other altcoins plenty of attention during each bull run, but prolonged bear markets are not treated as seriously.
The market cap factor is the same thing a pilot does once they notice the first warning light on their instrument panel. This pilot knows that instead of panicking and looking out the window, making sure they have the most current data will allow them to make the right decisions and get back in the air.
