When you’re starting out in the world of cryptocurrency, you’ll likely come across cryptocurrency market capitalisation, or see crypto ranked by its market cap.
Getting familiar with this concept may help inform your decisions when it comes to buying different types of cryptocurrency.
What is market capitalisation?
If you’re familiar with the world of investing, you’ve likely already heard the term market capitalisation thrown around.
In the stock world, this refers to the total dollar market value of outstanding shares of a company. It’s calculated by the total number of shares multiplied by the dollar value of each individual share. For example:
market cap = total number of coins × price of each coin
So, what about cryptocurrency market capitalisation?
For the most part, this functions in the same way as market cap in the stock market.
Every cryptocurrency has a fiat market value, which fluctuates based on a variety of factors. The total crypto market cap of a particular coin just means the price of the coin, multiplied by the total number of coins in circulation.
Depending on which methodology you use though – circulating supply, fully diluted supply, or max supply – you may interpret a cryptocurrencies market capitalisation slightly differently.
This is the most popular method. It looks at the coins that have already been mined and are in public circulation at the time.
Fully Diluted Supply
As a metric, this constitutes total coins as those that are already in circulation, and those yet to be mined.
Max supply takes into account the maximum amount of coins that could potentially be created in the lifetime of that cryptocurrency.
The majority of the time, a cryptocurrency’s market value will be calculated based on that coin’s circulating supply.
Are crypto market capitalisation and fiat investment the same?
This is a common error in the world of cryptocurrency. Just because a particular crypto has a market capitalisation of, say, $2 billion, doesn’t mean $2 billion has actually been invested in that coin.
This could happen for a few different reason:
Rapid increases or decreases in demand
A sudden spike in the demand of a cryptocurrency and the aggressive bidding behind this may raise the price of a particular coin and, in turn, raise the market cap. However, if that demand suddenly decreases and people rapidly sell off their coins, despite the initial surge causing a market cap value of X amount, doesn’t mean X amount of fiat currency was actually invested or that sellers will then be able to withdraw this.
Coins not selling when they’re initially created
When a coin is mined and introduced to the market, it isn’t guaranteed it will sell. Say for example 10,000 coins are mined but only 100 are purchased at $1 each. Even though only $100 of fiat currency has actually been invested in that crypto the market capitalisation is still $10,000.
Why crypto market cap is important for you to consider
Like the stock market, there’s no guarantee a particular cryptocurrency will behave the way anyone expects it to. However, market capitalisation can be used as a rough gauge to estimate how stable a particular crypto is likely to be.
The bigger the market cap of a coin is, the less likely it is to be subject to dramatic changes in market sentiment.
A larger market cap can indicate a coin’s popularity and market dominance which may also indicate it has experienced relatively stable growth over the years.
What is the global crypto market cap?
The global or total cryptocurrency market cap is the total value of all the coin market caps combined. In April 2021, the global crypto market surpassed $2 trillion for the first time, and before the market crash in May 2021, it reached $2.5 trillion dollars.
Should you take a cryptocurrency market capitalisation into account
Whether you ultimately decide to purchase a particular cryptocurrency or not is up to you, but understanding how a coin’s market capitalisation may affect its volatility is important.
Bitcoin and Ethereum are two examples of large caps, with market capitalisations in excess of $300 billion each, and as such are viewed as ‘safer’ or more conservative choices. Other large-cap coins include Tether (USDT), Ripple (XRP), Binance Coin (BNB) and Cardano (ADA), which are all in excess of $40 Billion.
If you opt to purchase mid-cap cryptocurrencies, those with market caps between $1 billion and $10 billion, these are often viewed as higher risk, but many also see these as potentials for larger growth.
Market capitalisation is only one factor to take into account when investing in any cryptocurrency. Factors like market sentiment, trading volume, and more all come into play, so it’s important to do your research.
Regardless, upskilling yourself around the behaviour of the cryptocurrency market will always be beneficial.
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