What is Cryptocurrency Market Cap?

Market capitalisation, simply called "market cap", is the market value of the outstanding shares of a company. It is a quick way to calculate the value of a company or enterprise. Because investing can be risky if not properly done, research is essential to determine if a company is a profitable venture to invest in; market capitalisation is one quick way to ascertain the value of a company.

Market cap is calculated by multiplying the current price of one share by the total outstanding number of shares. For instance, an IT company with 10 million shares and each share sold for $40 would have a market cap of 

$40*10 million = $400 million.

The market cap can be used to rank companies by demand, value, and the public's opinion about them. However, cryptocurrencies aren't like these companies, and the market capitalisation for crypto is slightly different.

The market capitalisation of cryptocurrencies is slightly different from the traditional market cap for financial organisations. In the crypto scene, market cap is the total value of all mined coins. The cryptocurrency market cap informs investors about the popularity, worth, and adoption of the cryptocurrency. It can also help determine how stable and prone to volatility a crypto asset is.

Bitcoin currently has the highest market cap at over $1 trillion while the total market cap of cryptocurrencies (over 6,600 coins) is just over $2 trillion.

The market cap is calculated by multiplying each coin's price by the total amount of cryptocurrency that is currently in circulation. Due to the volatility of digital currencies, the market cap of a cryptocurrency can rise and fall within a day. Cryptocurrencies with a higher market cap are usually more volatile than digital currencies with a small market cap. However, investors prefer to trade with cryptocurrencies with a higher market cap because they consider them more stable, trusted, and valuable investments.

Sometimes, you may find investors refer to the “circulating supply” or “fully diluted supply” while calculating the cryptocurrency market cap. The same formula is being applied to estimate the market cap; however, the amount of coin used in calculating the market cap differs. For instance, bitcoin has a total of 21 million coins that would be mined eventually. Some investors may prefer to use this value to calculate the market value: that is, 21 million coins multiplied by the coin's current price. This is what is known as a fully diluted supply.

Most investors prefer to calculate using only the cryptocurrency that is presently in circulation (mined). The cryptocurrency that is currently in circulation is referred to as the circulating supply. Therefore, investors can either use the circulating supply or fully diluted supply to determine the cryptocurrency's market cap.

The market cap is a metric for ranking cryptocurrencies. Cryptocurrencies can either fall within the category of large-cap, mid-cap, and small-cap. This can inform an investor about the risks of investing in that currency.

Large caps are considered the safest investment in the crypto world because they have relatively stable growth and lower chances of failing. Cryptocurrencies that are worth 10 billion dollars and above are considered large-cap cryptocurrencies. Currently, bitcoin, ethereum, and ripple fall in this category.

Cryptocurrencies that fall within this category have a relatively smaller market cap than large-cap currencies. The growth rate is higher and prone to more volatility. Mid-caps are considered less stable than large-cap cryptos. The cryptocurrencies within these categories are valued between $1 billion and $10 billion.

Cryptocurrencies within this category have the smallest market cap. They are considered high-risk investments because the chances of them failing are higher. This is because they may crash from one minute to the next, resulting in a loss. However, for expert crypto traders familiar with the market trends, small market cap currencies offer the potential to generate wealth. This is because if a small-cap crypto “picks up”, there is an opportunity to make up to 10x your investment within a short time. Cryptocurrencies with a market cap below $1 billion are considered small-cap.

Read also: What is Technical Analysis (TA)?

The market cap of a cryptocurrency seems like the fastest means to determine the value of a cryptocurrency; however, many critiques surround its effectiveness as a true measure of value. This is because the market cap of cryptocurrencies is sometimes largely influenced by their adoption (popularity). The market cap, for instance, doesn't offer much information about the trading volume of a cryptocurrency.

Although the market cap offers insights into a cryptocurrency's performance and value, it doesn't provide information about the money inflow. This is because the market cap does not necessarily represent the amount of money the cryptocurrency holds in the market. Thus, a shift in the price may significantly degrade or increase the market cap significantly.

For instance, a pump in the price of a cryptocurrency would increase the market cap. However, this does mean that the pump in the price was due to an inflow of money; the inflow of money into the market is dependent on liquidity and volume. Volume refers to the number of assets that are exchanged within a particular period. Liquidity refers to the extent (degree) to which an asset can be quickly bought and sold without leaving an imprint on its price.

So, while the market cap can provide a snapshot of the overall standing of a cryptocurrency, it does not always provide a current measure of its actual value.

A market cap is a valuable tool in measuring the potentials of a cryptocurrency investment-wise. However, it should be used with other metric tools to measure the investment potential of a crypto asset. As always, do your own research (DYOR) on the cryptocurrency you wish to invest in to weigh the risks of investing in it.