Market capitalization is a key measure in the world of cryptocurrencies.
This important metric shows the total value of a token and gives investors important information about its popularity and potential for growth.
To calculate the market cap of a specific cryptocurrency, you simply multiply the current price per token by the total number of tokens in circulation.
As an example, let's take Ethereum (ETH), one of the top cryptocurrencies. In the first nine months of 2021, Ethereum's market cap increased by about 50 times, reaching $500 billion.
Why Market Cap So Important in Crypto
The market capitalization of a cryptocurrency is a crucial metric in the crypto market.
It provides investors with valuable insights into the token's potential for growth and its dominance in the market.
Unlike traditional stocks, where investors can rely on financial statements to assess companies, cryptocurrencies lack such data, making market capitalization the primary metric for evaluating their value.
According to Titan, back in 2021, Tesla boasted a staggering market cap of about $1 trillion, far exceeding its sales of $36 billion in the first nine months.
This difference between market cap and revenue indicates investors' bullish outlook on Tesla's future prospects, particularly in the global change towards electric vehicles.
Market cap and investment strategies
According to Moonpay, market capitalization is categorized into three main sizes: large cap, mid cap, and small cap. Each category carries different levels of risk and growth potential for investors.
- Large-cap cryptocurrencies, with market caps exceeding $10 billion, are considered relatively stable and less volatile investment options. These tokens, such as Bitcoin and Ethereum, have established track records and popular adoption. Investors might allocate a portion of their portfolio to large-cap cryptocurrencies as a long-term investment strategy, banking on their stability and potential for steady growth over time.
- Mid-cap cryptocurrencies have market caps ranging from hundreds of millions to a few billion dollars and include tokens like Polygon (MATIC) and Aave (AAVE). These cryptocurrencies offer moderate risk with the potential for high short-term growth. So, investors seeking higher returns may allocate a portion of their portfolio to mid-cap cryptocurrencies to benefit from their growth potential and innovative technologies.
- Small-cap cryptocurrencies, have market caps of less than $1 billion and usually include new tokens with high growth potential but higher risk. Examples include Flux (FLUX) cap $309,780,557 and StormX (STMX) cap $74,013,149. Investing in small-cap cryptocurrencies like this can be highly speculative, with the potential for price fluctuations and volatility. So, investors interested in high-risk, high-reward opportunities might allocate a small portion of their portfolio to these types of tokens, but should be prepared for volatility and potential losses.
Difference between Market cap and volume
Market capitalization measures a cryptocurrency's total value in the market, while trading volume shows the total number of tokens traded within a specific timeframe. Similarly, both metrics provide insights into the market, but serve different purposes and reflect different angles of market activity. According to a post by Coinswitch here are the key differences between them
Market cap offers a long-term view of a token's value and popularity, providing investors with a measure of its size and dominance in the market. More so, it takes into account factors such as price and circulating supply.
On the other hand, trading volume indicates short-term trading activity and liquidity in the market. It is the total number of tokens bought and sold within a specific timeframe. High trading volume indicates increased market activity and liquidity, which sometimes leads to higher prices and market capitalization. However, low trading volume may result in price decline, affecting a token's market cap.
What are the risks of relying on market cap in crypto?
Market capitalization is usually not without risks. One of the primary concerns is the lack of regulation and oversight, allowing token issuers to manipulate supply and distort market cap figures. This sometimes can lead to inaccurate valuations and misrepresentation of a token's true value. Moreover, many tokens are often locked up in dormant digital wallets or lost, leading to differences in circulating supply and market cap calculations. This can also result in inflated or deflated market cap figures.
Another risk associated with relying solely on a token market cap is the dynamic nature of the cryptocurrency market. Prices and market caps can fluctuate rapidly due to factors such as market sentiment, regulatory developments, and technological advancements.
Factors Affecting Market Cap
- Supply refers to the total number of tokens in circulation, which varies depending on token issuance schedules and burning mechanisms. Limited supply can create scarcity, increasing demand and increasing prices and market cap. Conversely, oversupply can lead to price depreciation and lower market cap.
- Demand plays a vital role in determining market cap, with high demand leading to increased prices and market cap. Factors such as investor sentiment, technological innovation, and macroeconomic trends can influence demand for cryptocurrencies. Additionally, adoption by individuals, institutions, and businesses can drive demand and contribute to higher market capitalization.
- Adoption refers to the acceptance and use of cryptocurrencies by a large audience, including consumers, merchants, and developers. It can increase demand for cryptocurrencies, leading to higher prices and market cap. Factors such as regulatory clarity, usability, and security can as well influence adoption rates and impact market capitalization.
The Importance Understanding Market Cap for Crypto Investment
- Assessing Growth Potential: Market capitalization is an indicator of a cryptocurrency's growth potential, so tokens with higher market caps are often perceived as more stable and less risky investment options, while those with lower market caps might offer potential for growth but come with high risk.
- Identifying Trends: Market capitalization allows investors to identify trends in the cryptocurrency market and gauge investor sentiment. Increases or decreases in market cap can indicate change in demand, adoption, or market.
- Comparing Cryptocurrencies: Market capitalization enables investors to compare different cryptocurrencies and assess their relative size and dominance in the market. This allows investors to identify leading cryptocurrencies and potential investment opportunities.
- Informing Investment Decisions: Understanding market cap helps investors make informed investment decisions and manage risk effectively. Considering market cap alongside other factors such as trading volume, price trends, and fundamental analysis, can help investors identify potential opportunities.
Where to track crypto market caps
Here are reliable resources to check crypto market cap:
- CoinMarketCap: CoinMarketCap is one of the most popular platforms for tracking cryptocurrency market capitalization. It provides data metrics on thousands of cryptocurrencies, including market cap rankings, prices, trading volume, and historical data. It has a user-friendly interface and offers extensive features that make it a go-to resource for investors seeking up-to-date market information.
- CoinGecko: CoinGecko is another popular platform for tracking cryptocurrency market caps. Similar to CoinMarketCap, CoinGecko offers a wide range of data on cryptocurrencies, including market capitalization, prices, trading volume, and historical charts. Additionally, CoinGecko provides unique features such as user-generated content and community insights, making it a valuable resource for investors.
MoonPay Price pages: With MoonPay Price pages, investors can access real-time data on popular cryptocurrencies like Bitcoin and Ethereum, as well as lesser tokens.