What Does Market Cap Mean in Crypto?

If you've been paying attention to the news lately, you've probably heard or read about November's "flash crash" or "Black Friday" disaster. "The global cryptocurrency market cap fell 6.1 percent to $2.78 trillion [...] wiping away nearly $169.5 billion according to back of the envelope calculations," according to The Street.

"Bitcoin's market capitalization has decreased to approximately $931 billion from $1.25 trillion on Oct. 21," according to a recent Reuters report. "Of the four most valuable cryptocurrencies by market capitalization—excluding the largest, Bitcoin, and Tether, a stablecoin pegged to USD—Ether fell 9.6 percent to around $4,300, Binance's BNB 8.9 percent to $590, Solana 7.5 percent to $225, and Cardano 9 percent to $1.90," according to a Forbes article.

Pride comes before a fall, as the saying goes. Many media sites praised crypto's record-breaking market cap prior to the meltdown. "Crypto markets tag $3T combined market cap for first time," according to Cointelegraph, and Fortune raved about crypto's good fortune: "Cryptocurrencies hit market cap of $3 trillion for the first time as Bitcoin and Ether reach new highs."

Crypto market valuation is always a hot topic, whether it's breaking records or seemingly dissipating into a black hole in a matter of days or even hours.

What is market capitalisation, and how does one calculate it?

Market capitalization is defined in a standardised and consistent manner. It is defined as "the entire dollar market value of a company's outstanding shares of stock," which is calculated by multiplying the total number of existing shares by the current market price of one share, according to Investopedia.

The idea behind calculating a cryptocurrency's market cap is identical, but there's one major difference. The market cap of a cryptocurrency is computed by multiplying the total number of coins mined (circulating supply) by the price of a single coin at any given time, rather than utilising the number of outstanding shares.

Market cap = total number of coins circulating x price

CoinMarketCap, which covers a variety of indicators linked to cryptocurrencies, is the most extensively used website for obtaining market cap data.

It's crucial to remember that the prices reported on CoinMarketCap are based on a volume-weighted average of all the prices from various exchanges. It's also worth mentioning that some crypto experts distinguish between circulating and totally diluted supplies. The magic number in terms of Bitcoin's completely diluted supply is 21 million, after which no more coins will be created.

What is the significance of market capitalization?

When determining the relative strengths and weaknesses of any specific crypto asset, as well as whether it will be profitable over a given length of time, traders must evaluate a variety of aspects. The price of a coin is one way to evaluate it, but many new traders mistakenly believe that a high or low price equals a high or low value. Because the price of coin X is significantly higher than the price of other coins, it must be a good investment, right?

The issue is that pricing is simply one component of the overall value equation. Market capitalization is far more useful, since it provides traders with a more thorough picture of a coin's growth potential and whether it is a hazardous or safe investment. Let's pretend we're comparing two coins, one with a lower price but a higher market cap, and the other with a higher price but a lower market cap for the sake of this debate. The higher-priced coin may appear to be a better investment on the surface, but its overall value is lower due to its lower market cap.

In general, the larger a coin's market cap is, the more powerful it is in the market. A currency with a huge market cap, such as Bitcoin, is also more stable than one with a small market cap. Size does important in this situation. Low-cap crypto projects may succumb to market whims, sending their value into a deadly downward dive from which recovery may be difficult, if not impossible. On the other hand, while trading low-cap coins amid favourable market conditions, there is a considerably bigger chance for massive gains.

Market capitalization categories

As the above overview reveals, there is a market capitalization hierarchy, which is divided into three categories: large cap, mid size, and small cap. Bitcoin and Ethereum, as the "gold" and "silver" of cryptocurrencies, for example, are large-cap (above $10 billion) and so considered lower-risk investments due to their documented history of growth and great liquidity. Mid-cap coins, on the other hand, have a lesser market cap (between $1 billion and $10 billion) but are riskier than their large-size counterparts. As a result, many people regard them as having greater promise but also greater risk. Small-cap cryptocurrencies (those with a market cap of less than $1 billion) have the smallest market capitalization and the most risk.

Despite this, high-cap currencies can be quite volatile. Bitcoin's price varied between $45,000 and $55,000 in September 2021, causing major market value fluctuations. We can plainly observe the degree of the volatility if we take 18.8 million as the circulating supply:

Market cap = total number of coins circulating x price

• $846 billion = 18.8 million x $45,000
• $940 billion = 18.8 million x $50,000
• $1.034 trillion = 18.8 million x $55,000

What factors influence the market capitalization of cryptocurrencies?

Which coin will have the greatest market cap of them all, in the mirror, mirror on the wall?

You've probably spent some time lurking among the various Reddit crypto communities, where there never seems to be a shortage of inquiries concerning any specific coin's current or prospective market cap, in addition to crypto news websites. Take this example from the Cardano community (no disrespect to Cardano supporters!):

The commentator is absolutely correct. Cardano's market cap of $4 trillion does appear to be "a little high." If this were to materialise, Cadano's market capitalization would be nearly twice that of Apple, the world's most valuable corporation. The question isn't so much whether Cardano's market value will soar to the moon (or another galaxy), but rather what factors influence market cap.

Tokenomics

As we all know, the total number of coins in circulation and the price of a coin make up the cryptocurrency market capitalization. Let's start with the circulating supply of a coin. This is known as "tokenomics" in the cryptocurrency sector, which refers to the quality, distribution, and manufacturing of crypto tokens. Because Bitcoin's supply is limited to 21 million units, demand is likely to rise as supply becomes scarcer. Increased scarcity, on the other hand, will lead to increased hoarding, resulting in a drop in circulation or trading volume.

In contrast, a project with a significantly larger amount of coins, such as Algorand and its 10 billion maximum ALGO, might purposefully depress its price by drip-feeding coins to the market over a long period of time to avoid high volatility caused by pump-and-dump schemes (e.g., whales buying up a large number of coins in order to drive up the price and then dumping the coins for profit). A sustained uptrend over a longer time frame is better than a high-risk, high-reward, high-volatility strategy in this scenario.

Dogecoin, on the other hand, is considered inflationary and operates on the opposite extreme of the "hard cap" spectrum (as opposed to deflationary like Bitcoin or, in the case above, ALGO). Dogecoin's supply is theoretically endless, yet the real supply will likely reach a practical limit, because its numbers are structured to increase at a specified absolute pace of five billion each year. Because of its known growth rate, its price should be easy to forecast, resulting in a clear use-value proposition as a valid currency given its predicted stability.

Feel the heat

Coin burning is another facet of tokenomics and market capitalization. Miners burn tokens to reduce supply and thereby boost or stabilise a token's price, as the term implies. In the absence of a comparable demand for the token, lowering supply does not guarantee an increase in price. Aside from supply and demand, there are other reasons for coin burning, such as reaching a more effective consensus through "Proof of Burn" (PoB), protecting against attacks (e.g., DDOS), and displaying devotion to a project's sustainability. Coin burning has been employed by a variety of projects, including Bitcoin Cash, Ripple, Binance Coin, Stellar, USDT, and USDC. Since the London hard fork, the Ethereum Network has burned over $2.4 billion worth of ETH in 87 days, totaling 702,886 Ethereum.

Cryptocurrency and its worth

The price or value of a coin is the other part of our market cap calculation, and there are several elements to consider. What is the relationship between the services developed on a blockchain and the coin itself? Is it a token for governance? What is a utility token? Is there a security token? The cost of production, availability on exchanges, governance, and regulatory environment all have an impact on price.

These include factors like competition, technical advancements, media frenzy, and the celebrity touch, in addition to supply and demand. It's an intriguing issue about which you may learn more in our article "How does cryptocurrency gain value?"

To (market) bring it to a close

As we've seen, cryptocurrencies, especially those with enormous market capitalizations, may be quite volatile, and market capitalization is only one factor to consider when analysing trading alternatives. However, you should now have a much better idea of what market capitalization is, why it matters, and how it is influenced. However, the golden rule remains the same: conduct your own research (DYOR) and only invest what you can afford to lose.