What is Market Capitalisation in Crypto?
Market cap overview
- Market capitalisation refers to the total amount of cryptocurrency tokens in circulation multiplied by the market price of each token.
- It is used to estimate a project’s value, though it is not 100% comprehensive.
- Market cap originally comes from stock market trading.
- It can be combined with other metrics including total supply and TVL to give context and provide better accuracy.
What is market capitalisation?
Market capitalisation (market cap) is a way to determine cryptocurrencies’ market value based on the circulating supply (total number of coins) and the price of each token. Originally coming from stock market trading, the calculation was traditionally used to work out a company’s market cap (total value). The sum of a project’s tokens is multiplied by each token’s current market value to get to the final market cap figure. Market cap is a common way to define token value and predict its total potential growth.
To better understand why market cap is important in crypto and why it is used to appraise value, it is worth taking a closer look at how it works.
How does market cap affect crypto price? A worked example
Project A has released a capped supply of 1,000,000 “A-Tokens” (AT) into circulation. This means AT can be traded on the open market via a cryptocurrency exchange or peer-to-peer (P2P).
The last price AT was bought and sold for was $1.50. Applying the formula for Market capitalization above, AT has a total market cap of $1,500,000.
If AT price goes down to $1.00, it’s market cap would change to $1,000,000.
Does market cap matter in cryptocurrency?
Yes, market cap matters in cryptocurrency. Market cap is usually considered a vague metric as it only takes two variables into consideration. However, it is one of the easiest and quickest metrics to learn and understand.
Understanding market cap, gives investors and analysts quick insight into the coins total value when comparing multiple coins.
However, it is best to learn and understand how to use market cap with other metrics.
Other factors to take into account
Market cap only takes into account the value of AT tokens. Whilst this makes it a good starting point for estimating Project A’s value, it does not reflect the project’s total value as Project A might have other sources of value that aren’t directly quantified by the market.
However, assuming AT has utility (has a practical use-case in the blockchain ecosystem), its market cap is an accurate way of assessing demand for Project A. The $1,500,000 figure can be thought of as the amount of money the public is potentially willing to spend to participate in Project A.
To the extent that value is derived from the utility, market cap allows potential participants to estimate Project A’s value.
Why is market cap important in crypto?
When considering which cryptocurrency to invest in, we usually look at the price and assume its value based on that. However, price is a fraction of the total value of a particular token in question.
Market cap helps stock market analysts and investors understand and compare the total value of multiple cryptocurrencies. It can also help investors predict the growth of a token in comparison to other cryptocurrencies.
How does market cap increase crypto?
There are two main reasons why market cap can increase: increase in supply or increase in the coin price.
Cryptocurrency price is dependent on the adoption and demand. As the adoption increases, more and more people want to buy and use it, hence the increase in demand. As more investors buy a specific coin, the available supply is reduced which drives the cost up.
The supply on the other hand can be capped (such as Bitcoins supply) or can be controlled by the smart contract (where a certain condition triggers the increase or decrease in the supply). As supply increases, more tokens become available, which in turn drives the price down.
Market cap is changed as either one of these fluctuates. Let’s take a look at the example:
- Crypto A has a supply of 1,000,000 coins in circulation, and each token is worth $1. This means that its market cap is $1,000,000.
- Crypto B has a supply of 200,000 coins in circulation, and each token is worth $2. This means that its market cap is $400,000.
- Even though Crypto A costs half as much as Crypto B, its total market cap (total value) is more than double in comparison due to its large market cap. This is a clear indication that Crypto A can potentially have more value than Crypto B.
What is a good market cap for cryptocurrency?
As a rule of thumb, $10 billion is considered to be a good market cap for large-cap cryptocurrencies such as Bitcoin, Ethereum and Cardano. In reality however, it is very hard to answer this, as every project is unique and will have multiple factors affecting its market cap.
Crypto and stock market cap variations
Market cap can be combined with other metrics and measures to add extra context and enable you to make better, more accurate decisions. Most projects only release a portion of their tokens for trading initially, and gradually increase this number to eventually reach a “total supply”.
Taking a measure of a token’s current market price, multiplied by its eventual total supply gives what’s called an “unrealised market capitalization”. Essentially, this figure represents the potential market cap value if all tokens were in circulation. This helps analysts to estimate the maximum potential value of a project.
Market cap can be combined with Total Value Locked (TVL), a metric frequently used in the decentralised finance (DeFi) space. Assessing a ratio of market cap and TVL allows analysts to evaluate a project’s market demand against its actual adoption. This is useful as it allows crypto investors and traders to understand and differentiate the “hype” from the true demand.
What to consider when analysing the crypto market cap?
Although the market cap is a good and easy-to-understand indicator of value, you should consider it alongside other metrics before you make any investment decision. Here are some considerations to make when interpreting market cap value:
- Supply: as previously mentioned, supply might not be released all at once, hence it is important to know the “unrealised market capitalization” value too.
- Staking: you will often find that a lot of cryptocurrency supply is locked in due to staking. This means the true value of the token is locked away and can create an illusion of a high market cap.
- Supply burning: to control the supply, some cryptocurrencies burn the supply for various (usually performance-related) reasons. For example, Ethereum uses gas fees to burn the supply. You need to know in advance if cryptocurrency has a burn mechanism to control the supply, as this will fluctuate the market cap.
- Uncapped market cap: many cryptocurrencies have an infinite supply and, during bull runs, the price can spike to create an illusion of high-value coins. So you need to know if a coin has an unlimited supply to understand the impact on its value.
- Market fluctuations: finally, one of the most important things to remember is that cryptocurrency is highly volatile. This means that the market cap will often fluctuate, sometimes by a lot. Hence it’s a good idea to check the market cap over some time to find any trends in the data before investing.
If you want to find the next big winner, you can quickly and easily identify the market cap by using online tools such as CoinMarketCap or CoinGecko. These tools will automatically calculate the market cap for you.
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