Market capitalization(or market cap) is the total dollar value of all the shares of a company or, in the case of Bitcoin or another cryptocurrency, all the coins that have been mined. In the world of cryptocurrencies, market capitalization is calculated by multiplying the total number of coins mined by the price of a single coin at any given time.
For a cryptocurrency like Bitcoin, the market capitalization is the total value of all the coins that have been mined. It is calculated by multiplying the number of coins in circulation by the current market price of a single coin.
Imagine that market capitalization is a rough indicator that tells you the likely stability of an asset. (Not to be overlooked is the fact that even Bitcoin, the cryptocurrency with the largest market capitalization, also suffers from volatility.) In the same way that a larger ship can safely sail through a storm, a cryptocurrency with a much larger market capitalization is more likely to be a stable investment than one with a much smaller market capitalization. . Conversely, digital currencies with smaller market capitalizations are susceptible to market vagaries and can therefore generate large gains but also drastic losses.
Side note: You may see references to the market capitalization of “circulating supply” or “fully diluted supply”. With Bitcoin, these numbers refer to either the 18.5 million that have been mined (“circulating supply”) or the 21 million that will be mined over time (“fully diluted supply”). Under the methodology, some observers will measure market capitalization based on circulating supply, while others will use the fully diluted amount.
Why Is Market Capitalization Important?
Price is just one way to measure the value of a cryptocurrency. Investors use market capitalization to take the whole picture into account and compare value between cryptocurrencies. As a prominent statistic, this can indicate a cryptocurrency’s growth potential and level of purchase security, compared to other digital assets.
As an example, let’s compare the market capitalization of two fictitious cryptocurrencies.
- Suppose Cryptocurrency A has 400,000 coins in circulation with a value of $1 each. This gives us a market capitalization of $400,000.
- Suppose Cryptocurrency B has 100,000 coins in circulation with a value of $2 each. This gives us a market capitalization of $200,000.
- Although the price per coin of Cryptocurrency B is higher than that of Cryptocurrency A, the overall value of A is twice that of B.
Furthermore, it is also important to note that the market capitalization of many cryptocurrencies can take a drastic turn due to their volatility.
What Can You Do With Market Capitalization?
Market capitalization allows you to compare the total value of one cryptocurrency with that of another, so you can always make an informed investment decision. Based on their market capitalization, cryptocurrencies are classified into three categories:
- Large market capitalization cryptocurrencies, such as Bitcoin and Ethereum, have a market capitalization of more than $10 billion. According to investors, these assets are low-risk investments because they have a proven track record of growth and are generally more liquid. This means that they can support a larger volume of people selling them without the price being affected to a large extent.
- Mid – market capitalization cryptocurrencies have capitalizations between $1 billion and $10 billion. They are generally considered to have untapped potential, but also higher risk.
- Low market capitalization cryptocurrencies have a market capitalization of less than $1 billion and are the most susceptible to dramatic changes based on market psychology.
Market capitalization is a useful metric for comparing the total value of cryptocurrencies. However, when weighing the risks of an investment, you must also take into account market trends, stability and your own financial situation.