What’s Crypto Market Cap? Why Does It Matter?

 What’s Crypto Market Cap? Why Does It Matter?

Market capitalization, commonly referred to as market cap, is a metric used to gauge the size and popularity of cryptocurrencies. It provides us with an understanding of the current value of a cryptocurrency in the market. The market cap of a cryptocurrency is calculated by multiplying its circulating supply by its current price.

The formula for calculating a cryptocurrency's circulating market cap is simple: current price multiplied by the circulating supply. As an example, let's consider the market cap of Bitcoin (BTC), the world's most popular cryptocurrency.

To find Bitcoin's market cap, we multiply its current price by the number of coins in circulation. For instance, if one Bitcoin is worth $21,450 (at the time of writing) and the circulating supply is 19 million, the market cap would be:

$21,450 x 19,125,843 = $410,249,332,350 or $410 billion.

While market cap gives us a good indication of a cryptocurrency's value, there is more to it. To fully understand its applications and impact on investors, it is important to delve deeper into its meaning, especially within the context of cryptocurrency.

How and why to use market cap

Contrary to popular belief, it's not just the price that determines the worth of a cryptocurrency, but rather its market cap that provides a more comprehensive and accurate representation of its value. Market cap is an essential metric that helps reveal a cryptocurrency's growth and how it stacks up against its competition.

To illustrate this point, consider the following scenario: there are two cryptocurrencies, A and B. Cryptocurrency A has a circulating supply of 500,000 coins, each worth $2. Using the formula mentioned earlier, we find that:

Cryptocurrency A's market cap = $2 x 500,000 = $1,000,000 or $1 million.

Now, let's say cryptocurrency B has a circulating supply of 150,000 coins, but each coin is worth $5, which is $3 more than one cryptocurrency A coin. To calculate cryptocurrency B's market cap, we use the formula:

Cryptocurrency B's market cap = $5 x 150,000 = $750,000.

How do market caps change?

As we can see, while cryptocurrency B coins may be worth more individually than cryptocurrency A coins, its overall market cap is still lower than that of cryptocurrency A.

Therefore, the market cap formula plays an important role in determining a cryptocurrency's global valuation. However, it's essential to keep in mind that cryptocurrencies are inherently volatile and their prices can fluctuate dramatically due to market conditions and other factors.

Market caps of cryptocurrencies are primarily impacted by two factors: supply and price. The number of coins a cryptocurrency has in circulation and the price of each coin determine the overall market cap. For example, if a cryptocurrency has a small number of coins in circulation but a high price for each coin, it can still have a large market cap. On the other hand, if there is a large number of coins in circulation but each coin has a low value, the market cap will be lower.

Market cap is important because it provides insight into how a cryptocurrency is perceived by the market and its dominance compared to other cryptocurrencies. It's a more precise metric than just the price, and it can also reflect market trends and patterns. Based on market cap, cryptocurrencies can be categorized into mega-cap, large-cap, medium-cap, and small-cap, with small-cap having the highest level of risk.

Another important factor that affects market cap is liquidity, which refers to an asset's ability to be bought or sold at its current market value. Cryptocurrencies with higher liquidity tend to have lower risk. Additionally, market cap can also include fully diluted market cap, which takes into account all possible coins that could be added to circulation in the future.

Summary

A cryptocurrency's market cap is determined by two factors: supply and price. The number of coins in circulation affects the supply and can impact the overall market cap. On the other hand, the price of each coin affects the market cap as well. A high price of a cryptocurrency can result in a large market cap, even if the number of coins in circulation is low. Conversely, a vast number of coins in circulation with a low price can result in a small market cap. Market cap is an important metric as it provides information about a cryptocurrency's dominance, popularity, and its position in relation to its competitors. Market cap changes can reflect market trends and fluctuations. Cryptocurrencies are classified into four main categories based on their market cap: Mega-cap, Large-cap, Medium-cap, and Small-cap. Liquidity, the capacity to buy or sell an asset at its current market value, can also significantly influence the market cap and investors' decisions. The fully diluted market cap takes into consideration all the outstanding coins, including locked-up coins and coins held by the team.