Guide to Market Capitalization: Everything you need to know about Market Cap
This market capitalization guide will take you through everything you need to know about the market cap, which often uses an important measure in the cryptocurrency market.
What is Market cap?
The market capitalization — or Market cap shortly — is a fancy term that shows the market value of a cryptocurrency. It is also a measure of the size of each cryptocurrency; the higher the market capitalization of a cryptocurrency, the greater the cryptocurrency compared to others. Bitcoin is the largest cryptocurrency by currently market capitalization.
How do I calculate market cap?
The calculation of market capitalization is straightforward. The golden formula:
Market cap is calculated by multiplying the current market price of a cryptocurrency by its total circulating supply. Let’s take a look at the calculation of market capitalization for Bitcoin:
At the time of writing, a single Bitcoin is priced at $ 6,375.04 and there are a total of 17,127,200 Bitcoins in existence at the moment, giving over a market capitalization of $ 109,186,585,088. Bitcoin have currently dominance close to 42,5%. This means that Bitcoin value makes up about 42,5% of the total cryptocurrency market.
Lets continue with 2 components to have a deeper understanding of:
1. Market price
Market price refers to the price of the cryptocurrency according to the current market prices. Simply put, it is the price where buyers and sellers agree at a given time on the open market. It is important to understand that the price of a cryptocurrency varies in different crypto exchanges, different crypto-currency pairs (Fiat or crypto base currencies) and different countries.
You can see that the prices of Bitcoin (BTC) is never equal in different exchanges and different base crypto-currencies at any given time. This is due to the differences in supply and demand momentum that ultimately dictates the price of a cryptocurrency. For example, the price of a Bitcoin may be more expensive in a country where there is little supply (due to a shortage of sellers) to meet a higher demand from potential buyers, such as in Zimbabwe or Nigeria. The best way to find the market price of a coin is to look at its total price, which is a single, average price of a coin in many different exchanges. You can access the total price in cryptocurrency price websites like CoinMarketCap.
2. Circulating supply
Circulating care refers to the current number of coins in circulation globally. This is not to be confused with overall delivery (total supply), that’s a very different thing. Here’s a screenshot from CoinMarketCap to understand the difference:
As can be seen, the current circulating supply of Bitcoin is 17,106,787 BTC. That means there are more than 17.1 million Bitcoins that are in existence at the moment, whether they are traded on a stock exchange, kept in portfolios or simply lost forever. Total offer refers to the total amount of coins that exist after the project, including coins that are still in existence (mined).
In the case of Bitcoin, the maximum supply of Bitcoin, which always stands at 21 million BTC exists. Due to the dismantling process, new BTC will be created until the power supply reaches the maximum supply of 21 million, and you will no longer be dismantled BTC left. At this point, the total supply will be the flow of circulating supply.
It is important to note that a majority of the tokens is pre-mined, which means that these tokens are already at the beginning of the project, and it will cease to be tokens that are created in the future. In this case, the total supply is equivalent to the circulating supply.
Types of market cape
There are 2 types of market capitalization metrics for the cryptocurrency market: market capitalization for each cryptocurrency and total market capitalization of cryptocurrency market .
1. Market capitalization for each cryptocurrency
This category is dedicated to each cryptocurrency specific to market capitalization. You can also find this information from CoinMarketCap.
Generally, a coin is sorted according to its market cap; a higher market capitalization means a larger size. By looking at the market capitalization of each coin is useful for a given coin assessment, or even compared to other coins. If you are planning to track the growth of the entire crypto market, then the next category would be helpful.
2. Total market capitalization of cryptocurrency industry
If you are a frequent visitor to CoinMarketCap or any crytocurrency price platform, then you would probably come across the entire market capitalization of cryptocurrency market. Here’s what you see when you visit CoinMarketCap:
Market capitalization is an indicator of the value of the entire cryptocurrency market. It is the sum of the market capitalization of all coins that exist in existence in the cryptocurrency space. There are a total of 1,605 coins and tokens currently in existence, and market capitalization measures the size of the entire market. This makes it much easier for us to identify the growth and strength of the cryptocurrency market at one time. Here is a graph that only shows that:
Currently, the market capitalization of the entire crypto industry stands at USD $ $256,675,407,436, which is far from its current high of more than $ 800 million at the start of 2018! As you can see, we can easily track the growth of the entire cryptocurrency market as a whole with this metric.
The importance of market capitalization
Financial theory says that the larger the company, or cryptocurrency in this case, the slower the growth rate of the cryptocurrency and the lower risk there would be. This is logical if we compare Bitcoin — which is the first and largest cryptocurrency — and a newly issued ICO Character. The newly issued ICO tokens are more likely to increase in price — double, triple, or in some cases more than 10 times in price in a relatively short time! — compared to Bitcoin. However, the risks would be enormous; There is an equally high probability that the newly issued coin will fail as it is extremely new and has not stood the test of time. In the case of Bitcoin, there are much lower risks as it has been back tested since its inception and has been proven in 2008!
In addition, lower market cap coins tend to be heavily manipulated by traders and whales (term for large investors). It is very easy for those with deep pockets to manipulate bottom toe coins, as the lack of trading volume rates can fluctuate wildly whenever they intervene in the trade. In the cryptocurrency there is basically no room for regulation, market manipulation is widespread. It’s much harder to manipulate a bigger coin market cap like Bitcoin because of its relatively higher value and trading volume. You have to trade large amounts of Bitcoins to move a market.
Should I look at current price or market cap?
There is a tendency to look at the prices of coins and to associate a value purely on the basis of its current price. For example, if we see a coin priced at $ 0.10 or $ 0.05, we immediately associate that the coin is considered ‘cheap’ and would think that there is a high probability that it will be twice as likely, triple- or even increase its value by a factor 10. However, this is a big mistake since it is an equally important factor to take into account when assessing the value of a coin: circulating supply. Let’s look at a comparison of Litecoin (LTC) and Ripple (XRP) to understand this confusion:
As you can see, Ripple is priced at 53 cents, which is a fraction Litecoin price of $ 96. Those who look at both coins only by their price would misinterpret Ripple as a coin, which may have a better chance of multiplying its value much higher than Litecoin, since it looks a lot ‘cheaper’. In their minds, it’s much easier for Ripple to double in value to $ 1 + than double Litecoin. However, the reality is that there is a much higher chance of Litecoin in value appreciation being far more than Ripple. This is because the circulating supply of Litecoin only 57 million, far lower than ripple of the power supply of 39 billion! This puts Litecoin at a lower market cap of $ 5 million compared to $ 20 million Ripple. In order to achieve ripple market capitalization, Litecoin needs to be priced 4 times it’s current value, which is about $ 400.
Therefore, it is important to look at the market capitalization, rather than coin price only on its own!
In addition, it is also important to remember that the total supply of Ripple is 100 billion, which means that it is over 40 billion of XRP not yet released. The economic theory states that a higher supply of something leads to a low price (assuming the demand is constant). This is because the value of the coin — represented by Market cap — is spread around additional coins, which drive lower the prices.
Is Market Cap All I Need?
With regard to any metric or indicator isolated you will not give the big picture. In the case of market capitalization, it is usually an indicator of the size or value of the coin. Investing in each cryptocurrency just by looking at an isolated metric would be dangerous, as there are many other factors that you need to consider when making an investment decision. Although rating a cryptocurrency can be extremely difficult, there are some indicators or features that you can look at to have a greater overview of each coin. Here is a checklist that will help you to understand what to look for when assessing each coin.