Whether you invest in a cryptocurrency, commodity, or public company, you should carry out due diligence and investigate it before investing. This is where Market Capitalization (Market Cap) comes into play.
The market capitalization metric is very important because it gives us a sense of the size or value of an asset in terms of USD, EURO, or another currency. In the case of a crypto market cap, every cryptocurrency has its own market cap, for example Bitcoin (BTC), is around $740 billion.
In this article, we shall discuss the concept of what is market cap in crypto and why it is important to understand this metric within the crypto ecosystem. Let's define what Crypto Market Cap is and how it is calculated.
What does Cryptocurrency Market Capitalization Mean in Crypto?
Before defining the meaning and how is calculated you need to know these three terms:
- Price: The current price on the different cryptocurrency exchanges.
- Circulating Supply: The total amount of the crypto in the market that can be traded, which is in circulation.
- Fully Diluted Supply: Is the total amount of crypto including the circulating supply and the amount that is not in the market.
So, what is market cap in crypto? In the crypto world when we say crypto market cap, we refer to the circulating supply and not the fully diluted supply. For example, in Bitcoin, the circulating supply is 19,023,512 BTC, but the Fully Diluted Supply is 21,000,000 BTC, since there will only ever be 21 million bitcoins, the difference between these two are the ones not in circulation and those still to be mined.
How is Market Cap calculated?
The following formula can be used to calculate a cryptocurrency's market capitalization:
Market Cap = Current Price x Circulating Supply
Let's make an example with SOL, Solana’s native crypto, by using CoinMarketCap data.
SOL Market Cap = $99.43 x 333,703,383.9 SOL = $33,180,127,461.17 (about $33.1 billion).
On the other hand, the Fully Diluted Market Cap is calculated by calculating the crypto current price times the Fully Diluted Supply, as you see in the formula below:
Fully Diluted Market Cap = Current Price x Fully DIluted Supply
SOL Fully Diluted Market Cap = $99.43 x 511,616,946 SOL = $50,870,072,940.78 (about $50.8 billion).
Why is market cap important in crypto for investors?
Investors look at the crypto market cap as a key metric. If you are new to this field and you want to invest in crypto, you should consider the market cap and not the current price, since you want to know how much of a possible upside a digital asset has compared to others.
When a new investor enters the space, they typically look up the top 10 coins by market cap, but they only check the price, such as XRP and ADA, which are trading at $0.65 and $0.85, respectively, and believe they are going to reach the price of ETH and BTC, which are trading at $2,893 and $38,991.65. In order for ADA to reach ETH price, its market cap would need to multiply by 3,500 approximately, having a market cap of $99.75 trillion, which is about 50 times more than the entire crypto market. That's why this metric is important for investors to know the growth possibilities and investment opportunities.
What can you do with market cap?
Market cap gives you information on one crypto so you can compare it with another and make investment decisions in terms of the risk you are willing to take. Cryptocurrencies can have different market capitalizations and are classified into three different groups:
- Large-cap cryptocurrencies: Cryptocurrencies that have more than $10 billion of market cap. These tend to be less riskier digital assets. Examples:Bitcoin (BTC), Ethereum (ETH), and Solana (SOL)
- Mid-cap cryptocurrencies: Cryptocurrencies that have between $1 billion and $10 billion of market cap. They have more risk and have more potential upside than Large cap ones.Examples: Litecoin (LTC), Uniswap (UNI), and Theta Network (THETA).
Small-cap cryptocurrencies:Cryptocurrencies that have less than $1 billion of market cap. These are the riskier ones, most volatile ones because of market sentiment. Examples: Compound (COMP), SushiSwap (SUSHI), and Anchor Protocol (ANC).
How to Use a Crypto Weighted Market Cap Strategy
Weighted market capitalization means you invest proportionately in each asset based on its market capitalization. This strategy could be done with a minimum of 2 and all the cryptocurrencies you want.
For example, if you want to invest $1000, and let's say you want to invest in three large-caps, two mid-cap , and one small-cap. The large-caps could be Bitcoin (BTC) that has a market cap of $740 billion, Ethereum (ETH) with a $350 billion market cap, and Solana (SOL) with $33.1 billion market cap. The mid-cap could be Litecoin (LTC) with a $7 billion market cap, and UniSwap with a $5.72 billion market cap.Lastly, the small-cap could be Compound (COMP) with a $839 million market cap.
If we sum the six market caps, the result will be $1,136.659 billion. The proportion of your investment using this strategy will be:
- Bitcoin (BTC) = ($740 billion / $1,136.659 billion) x 100 = 65.10% = $651
- Ethereum (ETH) = ($350 billion / $1,136.659 billion) x 100 = 30.79%= $307.9
- Solana (SOL) = ($33.1 billion / $1,136.659 billion) x 100 = 2.90% = $29
- Litecoin (LTC) = ($7 billion / $1,136.659 billion) x 100 = 0.61% = $6.1
- UniSwap (UNI) = ($5.72 billion / $1,136.659 billion) x100= 0.50%= $5
- Compound (COMP) = ($0.389 billion / $1,136.659 billion) x 100 = 0.1%=$1
The Crypto Weighted Market Cap Strategy makes you put most of your money into large-cap cryptos to mitigate the risk.
It is very important to understand the high risks associated with investing in cryptocurrencies. The market is relatively new and dates back almost 14 years since Satoshi Nakamoto published the bitcoin white paper. The market is still maturing and is still very volatile, having yet to gain popularity and spread. You should always research and investigate before making an investment.
The market cap is one of the most important metrics in the crypto world for making investment decisions, and this is why you need to know what is market cap in crypto. If you are determined to enter the market, then a market cap-weighted cryptocurrency strategy may be a good start, as it offers a conservative way to build a portfolio by reducing risks by investing the majority of your capital in cryptocurrencies with large market caps.
FAQ
Is market cap the best way to measure the popularity of a cryptocurrency?
The market capitalization of a cryptocurrency is one of the best ways to measure the cryptocurrency's overall popularity compared to other coins. It should be noted that this is not a 100% foolproof strategy as the market is still in its infancy and can easily swing either way.
What does market cap tell you?
Market capitalization indicates the amount or value of an asset in US dollars or other fiat currencies. Market capitalization helps investors make investment decisions by allowing them to see where a cryptocurrency stands on the stage and how much growth it can achieve compared to the market capitalizations of other cryptocurrencies.
Is a high or low market cap good?
The market capitalization of a cryptocurrency can be viewed as a confidence rating. A higher market capitalization gives investors peace of mind knowing that the currency is somewhat popular and chosen as an investment by others, compared to low market cap coins, which are much more volatile, riskier, but have the biggest upside potential.
What does market cap mean for dummies?
Market capitalization measures the total market capitalization (value) of an asset in US dollars or other fiat currencies. For example, the market capitalization of Amazon is $1.43 trillion and the market capitalization of Bitcoin is $740 billion.
How does market cap affect price?
The higher the market capitalisation, the higher the price of a coin will be, and the lower the market capitalisation, the lower the price of an asset will be. The formula for calculating the market capitalization of a cryptocurrency is by multiplying the current (trading) price of the cryptocurrency by the circulating supply.
Which cryptocurrency has the highest market cap?
According to CoinMarketCap, bitcoin (BTC) has the highest market capitalization ($740 billion) of the entire crypto market, with a 42% market dominance (share).
Does market cap determine price crypto?
Yes, if you know what the market capitalization is and the circulating supply of an asset, you can determine the price by dividing the market capitalization by the circulating supply and the result will equal the current spot price of the asset.
