How Does Crypto Market Capitalization Work?
As a cryptocurrency investor, there are a wide variety of tools and indicators you can use to decide on your strategy. How can you tell whether a certain coin is stable? If it will continue to grow? If other investors buying into it believe it has a future or if they are planning a quick resale?
One of the best and simplest indicators of a coin's value is its market capitalization, or crypto market cap. This term is originally borrowed from traditional finance and in recent years has come to replace the more traditional term, money supply.
We have all the information you need to calculate the crypto market cap now and some handy tools along the way.
What is the crypto market cap?
Market cap is shorthand for 'market capitalization'. Traditionally, it would refer to the total value of a publicly-traded company's outstanding shares, that is all shares that have been issued by a company and purchased by investors.
When applied to cryptocurrency, market cap refers to the total value (in fiat) of a cryptocurrency's coins that are in circulation. Just as the market cap of a company only assesses the value its outstanding shares, so the market cap of a cryptocurrency only assesses the value of its coins in circulation.
Market capitalization is an assessment of the value of a company of cryptocurrency on the market. Since the market cap looks like a value on public markets, it can be used as an indicator of the public's opinion of a cryptocurrency's worth.
Market capitalization can also be calculated for the entire cryptocurrency market and again can be used as an indicator of the public's assessment of its worth.
How to calculate the market cap for particular crypto?
A simple formula determines the market cap for a particular cryptocurrency or the market as a whole.
Multiply the number of coins in circulation (either for a specific issuer or in the market as a whole) by their fiat value. Of course, If you are calculating the market as a whole then the value of different coins varies greatly.
To demonstrate the process, let's have a look at the five biggest coins in April, 2022.
|Coin Issuer||Circulating supply||Price||Market cap crypto|
Or let's do another example where the amounts are a little easier to hold in your head. If a cryptocurrency has 100 coins in circulation and is currently priced at $2 per coin then the calculation of the market cap would be:
100 (coins in supply) x $2 (price per coin) = $200
Makes sense? If so, you are ready to start comparing crypto exchanges:
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Why is calculating the market cap useful?
Calculating the market cap is useful because it gives you an indicator of a cryptocurrency's popularity and its strength against its competitors. The market cap allows you to compare cryptocurrencies that have different prices and different amounts of coins in circulation. Market cap does not tell you how much potential a cryptocurrency has, but it does indicate how much potential other people think it has.
As a general rule, cryptos with a larger market cap will be better know and therefore easier to buy and sell. When there are fewer buyers and sellers it means that the crypto is less liquid and it may take a longer time for the trading platform to match your buy and sell orders.
Alternatively, you might be looking to get in on the ground floor and be searching for the crypto with the lowest market cap. You can of course use the same formula to do this.
As the market cap is an assessment based on coins in circulation and coin valuation, it is an indicator that fluctuates at the same speed and with the same unpredictability as the market itself. While it can be a good way to step back and take a look at the bigger picture, that is all it can ever provide: a snapshot of the market at a specific point in time.
How does the crypto market cap increase?
The market cap for a cryptocurrency will increase if more coins are put into circulation. If the currency is based on mining, then the market cap will increase as more coins are mined and used. The more currency that enters circulation, the higher the total number and consequently the market cap is raised.
If the value of individual coins increases then again the market cap will increase. If however the raise in price is caused by scarcity, due to a fall in the total number of coins in circulation, then the market cap will not raise.
What is the total crypto market cap?
The total market cap in crypto is the total value of Bitcoin, stablecoins, altcoins, tokens and other assets on the crypto market. The total crypto market cap is calculated by multiplying the total fiat value of all cryptocurrencies in circulation by the circulation supply.
This is a highly volatile number as it is responsive to changes in every single cryptocurrency currently in circulation. In the course of the first 6.5 years of cryptocurrency's existence, the total market capitalization never moved passed $20 billion. Since the most last record high of $770 billion in 2018, there have been fluctuations in the market of hundreds of billions of dollars.
But to give one example and a general sense of the market: as of June 14th, 2022, the total cryptocurrency market capitalization was $51.6 billion USD (or $516 151 498 393 to be exact!)
How important is the crypto market cap?
Fundamentally the crypto market cap gives the investor a sense of the size of the industry as a whole as well as the size and health of individual coins and assets. It can be used as the basis for comparison with other parts of the global economy.
Since its inception, it has been most common for financial analysts to compare the crypto market to that of precious metals. The total market caps are the metric by which the two markets are compared. Some analysts believe that a comparison between the two markets may yield predictions as to how the cryptocurrency market may behave in the future.
Good to know
Market cap comparisons should not be the sole basis for decision-making. The precious metals market and crypto market attract different investors and may behave in totally different ways.
What is a diluted market cap?
One way to look at the future of a cryptocurrency is to calculate the diluted market cap. When calculating the standard market cap, remember, that you multiply the price of the currency by the amount of the currency in circulation. The diluted market cap is calculated using the value of all currency whether in circulation or not.
For example, we know that the limit of all Bitcoins that can be mined is around 21 million. In April 2022, just over 19 million Bitcoins were already in circulation. Once the remaining possible 2 million Bitcoins have been mined the currency will be fully diluted. We can estimate the future total market cap by calculating the diluted market cap. This figure will not be accurate however as the price of Bitcoin is unlikely to be the same at the point when it reaches full dilution.
If you are ready to begin trading or if you are looking for some more info before diving straight in, use the link below:
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