Of all the financial innovations that have come about in recent years, few have been as controversial or generated as much interest as cryptocurrencies. These new forms of digital money have defied all expectations, with their prices reaching astronomical highs that dwarf even the most optimistic predictions.
But for all their popularity, there is still much confusion surrounding cryptocurrencies. One of the most common questions is related to market capitalization, or “market cap.” What is it, and why does it matter?
In short, a market cap is a way of measuring how much an asset is worth. Market caps are metrics the finance world uses for everything from company valuations to the stock market and commodity prices. To calculate market cap, you take the current market price of an asset and multiply it by the total number of units in circulation.
For visual math-minded readers, the market cap calculation looks like this:
Market Cap = (Current market price in USD) x (Total units in circulation)
For example, take Apple Inc. (AAPL). As of writing, the market price of one Apple share is $150.70, and a total of 16.07 billion shares are outstanding. To calculate the market capitalization:
($150.7) x (16.07 billion) = $2.4 trillion.
Apple is the second most valuable asset by market capitalization, below gold, which has a market cap of about$11 trillion.
What Does Market Cap Mean for Crypto?
Why does this matter? Regarding market cap, crypto is in a league of its own; its price dynamics are as fickle as they come, and the market is still very young. Nevertheless, cryptocurrency market capitalization is an essential metric for understanding where a digital currency stands in relation to others.
Cryptocurrency market caps give investors and market participants a quick way to compare the relative sizes of different assets. For example, although Ethereum is the second largest cryptocurrency by market cap ($175 billion), it has less than half the market cap of Bitcoin ($377 billion). Both of these coins are classified as large-cap cryptocurrencies (any market cap exceeding $10 million), though mid-cap coins still have relatively high current prices and trading volume (any market cap between $1 billion and $10 billion).
This market cap disparity reflects how individuals value an assets and how much it is worth to the market. While other digital assets like Solana, Dogecoin, USDT, XRP, and more have market caps that are smaller in comparison, their market caps are still billions of dollars more valuable than the rest of the market.
Many view top market cap assets as the most trustworthy and robust investments in the digital currency market. There is a consensus that the market cap leaders, Bitcoin and Ethereum, are the “blue chips” of crypto and are more likely to weather market storms by maintaining their market value over time. Even though cryptocurrency and blockchain are comparatively riskier than traditional assets, the top market cap leaders communicate a sense of stability to the market.
Other Things It Means for Crypto
On the other hand, some individuals view the entire crypto market as a speculative risk and prefer to invest in smaller market cap assets that have the potential to generate higher returns. So why do small-cap cryptocurrencies have more return potential? Why would investors choose altcoins over a large-cap stablecoin such as Binance or Tether? It all comes down to market dynamics.
When investors eye a smaller-cap asset, they are essentially betting that the market has not yet fully priced in all of the potential growth for that asset, or at the very least, that there is more room for the coin price to grow.
Human psychology also comes into play here; people are more likely to pay attention to an asset “on the rise” and generate FOMO (fear of missing out), which can contribute to market momentum. That thinking is by no means logical, but it’s the market reality.
Issues With Market Cap
Though market caps are helpful, it’s important to note that they’re not without their flaws and should not be used as the sole metric for evaluating an asset. Here are a couple of reasons why:
Market cap doesn’t consider the total number of coins: Market caps only include circulating supplies or the number of units currently available on the market. This is different from the total supply, which consists of all units that will ever exist. For example, Bitcoin has a circulating supply of about 19 million BTC, but its total supply is 21 million BTC.
This is because only 21 million BTC will exist, so once all units are mined (only 3 million more), the circulating supply will match the total supply. Compare this to many other cryptocurrencies, which either have no max supply or have a very large total supply that will enter the market in the future. Additional supply can have a significant impact on market cap and price.
Market cap doesn’t take into actual money invested: For example, let’s say you create a coin with a circulating supply of 100 million coins. You tell a friend, and they buy one of those coins for $1. If CoinMarketCap listed this coin, it would have a market cap of $100 million, even though only $1 went into the market. But, of course, this does not mean that $100 million worth of actual money is invested in the market.
The Illusion of Cheap Prices
Some crypto investors mistakenly view a low asset price as a good thing. For example, let’s say asset A is trading at $1 and has a market cap of $10 billion, while asset B is trading at $10 and has a market cap of $1 billion. An investor might think that buying asset A is a better deal because they can get more units for their dollar.
However, though asset A is cheaper, it doesn’t mean it’s a better deal. As we discussed, smaller market cap coins generally have more return potential in crypto. In this case, many would say asset B is the better deal because even though it’s more expensive per unit, it has more room to grow.
Wrapping It Up
Market cap metrics help evaluate cryptocurrencies against the broader market and each other. However, the market cap should not be used as the sole metric for making investment decisions; it can be a highly flawed metric. Instead, it’s important to consider market cap and other factors, such as utility, level of development, community support, and technological capabilities.
Crypto markets rise and fall as quickly as the wind blows, and it’s easy to get swept up in the market hype. It’s essential to research and learn as much as possible about the market before investing in certain crypto assets.
Sarson Funds is the best place to do just that. Stay up-to-date with our market insights, educational content, consulting, and investment opportunities through unbiased education, thoughtful analysis, and market-leading services. Among our services, Sarson Funds offers a Cryptocurrency Financial Advisor Certification program to familiarize financial professionals with digital assets and how to advise their clients on investing.
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