What is market cap?

For a cryptocurrency such as Bitcoin, market capitalization (or market cap) refers to the total worth of all created coins. It is computed by multiplying the number of coins in circulation by their current market value.

Market capitalization (or market cap) is the total dollar value of all outstanding shares of a company’s stock, or, in the case of Bitcoin or another cryptocurrency, all mined coins. The market capitalization of a cryptocurrency is determined by multiplying the total number of coins mined by the current price of a single coin.

One method to consider market capitalization is as a rough indicator of an asset’s stability. (It is crucial to note that even Bitcoin, the cryptocurrency with the largest market capitalization, nevertheless experiences volatility.) 

A cryptocurrency with a much larger market capitalization is more likely to be a reliable investment than one with a significantly smaller market capitalization, in the same way, that a larger ship can safely sail rough seas. In contrast, digital currencies with smaller market capitalizations are more sensitive to the whims of the market and can see enormous gains or losses as a result.

You may encounter references to “circulating supply” or “completely diluted supply” market cap. You can use the 18.5 million that have been mined (“circulating supply”) or the 21 million that will eventually be mined (“completely diluted supply”) when discussing Bitcoin. Depending on their technique, some analysts will calculate market capitalization using the circulating supply, whereas others will use the completely diluted number.

Why is market capitalization vital?

Price is only one way to measure the value of a cryptocurrency. Using market capitalization, investors can create a more complete story and compare the worth of several cryptocurrencies. As an important statistic, it can suggest a cryptocurrency’s development potential and whether it is safe to purchase relative to others

To illustrate, examine the market capitalization of two fictitious cryptocurrencies.

The market capitalization of Cryptocurrency A is $400,000 if there are 400,000 coins in circulation and each coin is worth $1.

The market capitalization of Cryptocurrency B is $200,000 if there are 1,000,000 coins in circulation and each coin is worth $2.

Even though Cryptocurrency B has a greater price per coin than Cryptocurrency A, Cryptocurrency A has twice as much value altogether.

Nonetheless, it is vital to realize that the market capitalization of various cryptocurrencies might fluctuate drastically due to their volatility.

What may market cap be used for?

Market capitalization enables investors to compare the overall worth of one cryptocurrency to that of another to make better-informed investment decisions.

By market capitalization, cryptocurrencies are divided into three categories:

The market capitalization of large-cap cryptocurrencies, such as Bitcoin and Ethereum, exceeds $10 billion. Investors view them as lower-risk investments because they have a track record of growth and frequently have greater liquidity, meaning they can sustain a greater number of investors selling without the price being significantly affected.

Mid-cap cryptocurrencies have market capitalizations between $1 billion and $10 billion; they are often regarded as having greater upside potential, but also greater risk.

Small-cap cryptocurrencies have a market capitalization of less than $1 billion and are most prone to extreme market sentiment-driven price movements.

Market capitalization is a valuable indicator for evaluating the total worth of cryptocurrencies, but you must also consider market trends, a cryptocurrency’s stability, and your financial status when weighing the dangers of an investment.

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