Definition
Market capitalization (market cap) represents the total value of all coins that have been mined for a cryptocurrency, such as Bitcoin. It is calculated by multiplying the number of coins in circulation by the current market price of a single coin.
In traditional finance, market cap refers to the total dollar value of a company’s outstanding shares. In the crypto space, it serves as an essential metric to gauge the overall value of a digital asset in the market.
Market cap can also be seen as an indicator of an asset’s stability. While even cryptocurrencies with large market caps, like Bitcoin, experience volatility, they tend to be less susceptible to extreme price swings compared to smaller-cap cryptocurrencies. On the other hand, digital currencies with lower market caps are more vulnerable to rapid fluctuations, leading to potential high gains or steep losses.
Circulating Supply vs. Fully Diluted Market Cap
Market cap can be calculated using either the circulating supply or the fully diluted supply of a cryptocurrency:
- Circulating Supply Market Cap: Calculated based on the number of coins currently in circulation.
- Fully Diluted Market Cap: Takes into account the total number of coins that will ever exist.
For example, Bitcoin’s circulating supply is around 19.7 million coins, while its maximum supply is capped at 21 million. Some analysts prefer using the circulating supply for market cap calculations, while others use the fully diluted number.
Why is Market Cap Important?
Market cap provides investors with a more comprehensive way to assess a cryptocurrency’s value beyond just its price. It helps compare different digital assets and offers insight into their relative market position.
Consider two hypothetical cryptocurrencies:
- Cryptocurrency A has 400,000 coins in circulation, each worth $1, giving it a market cap of $400,000.
- Cryptocurrency B has 100,000 coins in circulation, each valued at $2, resulting in a market cap of $200,000.
Although Cryptocurrency B has a higher price per coin, Cryptocurrency A has twice the overall value. This illustrates why market cap is a more reliable metric for assessing a cryptocurrency’s standing in the market. However, it is essential to keep in mind that market caps can change rapidly due to price volatility.
How Market Cap Helps in Crypto Investing
Market cap is used to classify cryptocurrencies into three categories:
- Large-cap cryptocurrencies: These include well-established assets like Bitcoin and Ethereum, which had market caps of approximately $1.3 trillion and $390 billion in March 2024. Large-cap cryptocurrencies are often considered lower-risk investments due to their liquidity and proven track record.
- Mid-cap cryptocurrencies: These have market caps ranging from $1 billion to $10 billion. They may offer higher growth potential but also carry increased risk.
- Small-cap cryptocurrencies: With market caps below $1 billion, these assets tend to be highly volatile and can experience significant price swings based on market sentiment.
While market cap is a valuable metric for evaluating cryptocurrency investments, it should not be the sole deciding factor. Investors should also consider market trends, the asset’s long-term stability, and their own financial goals before making any investment decisions.