- The market cap shows the value of the particular coin, its growth potential and level of risk.
- The metric relies on each coin’s price and supply.
- There are two types of market capitalization according to the supply. Both are important.
A lot of investors hunt for cryptocurrencies with low prices. But that’s a mistake.
“The cheaper the coin, the more potential to grow, the bigger the return,” thinks the investor. The truth is, coin prices tell nothing about their real value. They give no hint as to whether cryptocurrency is cheap or expensive, underpriced or overvalued.
It is the market cap that answers that question.
What Is the Market Cap?
Market capitalization (market cap) is one of the fundamental metrics to look at before investing.
The market cap of any particular crypto shows the total value of coins that are already minted and circulating. It indicates how the market really values a certain cryptocurrency and helps investors to understand what to expect from it.
How Is It Calculated?
Market cap is calculated by multiplying the coin’s current price by its circulating supply. The formula here is simple:
MARKET CAP = PRICE x CIRCULATING SUPPLY
The price refers to the current value of a coin at any given moment. The circulating supply is the number of coins or tokens that are already minted and publicly available to trade. Circulating supply is not the same as maximum or total supply.
Maximum supply shows the finite number of how many coins will ever be issued. Total supply includes the number of coins that were created but later removed from circulation (burned) or are still reserved by the founders and thus publicly unavailable.
Publicly unavailable coins are not in circulation and thus have no effect on price. This is why the circulating supply metric is used to calculate the coin’s current market cap.
A piece of apple pie costs $5. There are only 10 pieces of apple pie, as it is cut this way.
The market cap of the apple pie = $50.
A piece of cherry pie costs $3. The cherry pie is cut into 20 pieces and thus its market capitalization is higher at $60.
What Can You Learn from That?
Despite the higher price of each piece of apple pie, the market capitalization of cherry pie is higher. This indicates that it is more valuable and successful than apple pie.
What Impacts Market Capitalization?
Market cap is not a stable metric. It varies according to changes in its two key variables: the coin’s price and the coin’s supply. As one of these two variables changes, so does the size of the market capitalization.
- Market cap goes up when the coin’s price rises.
- Market cap goes down when the price drops.
- Market cap always goes down when supply increases. The more new coins are added, the more selling pressure they create, leading to a price drop.
The only case when supply does not affect the market cap is when it equals the fixed maximum supply of coins that will ever be issued.
What Can Market Cap Tell You?
Market capitalization is a critically important metric for investors to follow. It helps to determine what prospects a certain coin has in the future: does it have the potential to grow or does it have an extremely high risk?
1. Shows the Value of Crypto
Similar blockchain projects may have completely different market caps. Despite the fact that they operate in the same field or solve the same problems, their value differs.
Like stocks, cryptos can be divided into 3 categories according to the size of market capitalization: large-, medium- and small-cap coins. Knowing the size of market capitalization allows us to compare different projects.
2. Hints at Potential Risks or Growth Possibilities
Different market cap sizes have different potential growth and risk levels. Accordingly, the same standards are given to projects that fall under certain market-cap size categories.
- Large-Cap Coins ($10 billion and over)
Large-cap cryptos are the top crypto projects like Bitcoin, Ethereum, or Cardano. They are more liquid, relatively less volatile, and more reliable due to their strong fundamentals. However, large-cap cryptos usually have less room to grow.
- Medium-Cap Coins ($1 billion to $10 billion)
Medium-cap coins are a mix of bright perspectives and a higher risk level. They have higher growth potential than large-cap coins, but their volumes and thus the price stability are lower. The possible returns may be higher, but so is the risk.
- Small-Cap Coins ($1 billion and below)
Small-cap cryptocurrencies are crypto projects in their early stages of development. They have the highest potential to explode and generate massive rewards, and are thus considered the hidden gems by investors.
On the other hand, small-cap coins are the most risky. They may come and go like the wind. They are not listed on the biggest crypto exchanges, their trading volumes are low, they have the biggest liquidity problems, and thus less stable prices.
3. Helps to Compare Coins and Diversify Your Portfolio
The market cap metric allows you to compare the value of different coins and thus make more thoughtful investment decisions.
There is a relation between the size of a certain coin and what growth potential it has, or how risky it is. Cryptocurrencies with different market capitalizations act differently under different market conditions or during certain time periods.
Knowing this metric allows you to diversify your investment portfolio with coins of different market caps. A diverse investment portfolio is less volatile, less risky, and may generate higher returns in the long term.
Fully Diluted Market Cap: What Is the Difference?
Market cap is one of the most popular metrics to measure a coin’s value. But sometimes it’s not enough for the bigger picture. This is where another term, fully diluted market capitalization, comes in.
As discussed, the market cap is calculated by multiplying the coin’s price by the circulating supply. That means it only relies on the supply that is publicly available at a certain moment.
The thing is, the circulating supply does not show the number of coins that are locked or reserved by the issuers or even haven’t been minted. If these coins will be added to circulation one day, they could dramatically change the cryptocurrency’s market value.
A fully diluted market cap (FDMC) relies on the coin’s maximum supply, thus on the final amount of coins that will ever be issued. If the coin has an infinite max supply, then the total supply metric is used to calculate FDMC. Here’s the formula:
FDMC = MAX SUPPLY x CURRENT PRICE
There are 10 pieces of apple pie available to buy for $5.
Circulating market cap = 10 x $5 =$50.
The chef said he will bake another 20 apple pie pieces and then stop selling them.
The total number of apple pie pieces would be 30 then.
Fully diluted market cap = 30 x $5 = $150.
What can you learn from that?
A fully diluted market cap shows how much the project can grow and what its future market capitalization might be. Depending on whether it is large or small, investors may evaluate potential risks and prospects more clearly.
In this case, increased supply may add selling pressure that leads to a price drop. On the other hand, the scarcity of the asset usually acts the opposite way and leads to price growth.
On The Flipside
- Market cap alone is not enough to make a final investment decision. The metric does not include factors like the project’s future development, competitive landscape, or team changes. Long-term investors certainly should check up on other metrics and fundamentals before buying a coin.
Why You Should Care?
Market cap shows how the market values a certain cryptocurrency. It is the key metric that defines if the coin is cheap or expensive. Knowing the size of a coin’s market cap allows investors to compare it with other coins.
Different sizes of market capitalizations have different growth potential and risks associated with them. Thus, knowing market caps allows us to better diversify and balance an investment portfolio.