What is Market Capitalization? A Beginner’s Guide

The performance and popularity of cryptocurrencies and NFTs are determined by experts according to their market capitalization. The market cap of an asset tells us everything about its value in the market and the trust of investors towards it. One can easily calculate the market cap of a cryptocurrency by using the share price and multiplying it by the total number of shares.

Cryptocurrencies aren’t like regular companies, and even if you hold a significant number of shares of a cryptocurrency, it doesn’t necessarily mean that you own any portion of the actual cryptocurrency in question.

When a new cryptocurrency is launched in the market, it’s offered to the public through an ICO or initial coin offering. It is different from regular stocks, which are offered through IPO or initial public offering.

By taking a look at the market cap of a cryptocurrency, investors can learn a lot about how it is doing.

Introduction to Crypto Market Cap

Every cryptocurrency has its own maximum supply allocated even before it is released, but this never affects the market cap as it is a different metric. You can calculate the market cap of crypto by taking the value of one token and multiplying it by the total number of circulating coins.

For example, if the value of one coin is $1, and there are 10 million coins of that cryptocurrency in circulation, its market cap comes out to be $10 million.

The algorithm of a cryptocurrency is what determines the total circulating supply of that currency by using a specific formula. Because cryptocurrencies can be mined, both the supply and buyer/ seller pressure keep influencing the market capitalization and value of a cryptocurrency.

However, cryptocurrencies are also burned to keep the supply under check. For example, although new cryptocurrencies are being added to circulation every day, they can also be burned by their developer by sending a specific amount to a wallet that is dead and irreversible.

Since there is no key present in that wallet, cryptocurrency sent to the wallet cannot be withdrawn. Since hundreds of thousands of cryptocurrency coins are burned every year, it can be considered as another factor that determines the overall market value of a cryptocurrency.

Depending on the script, the developer can also develop their cryptocurrency to unlock at a specific time. For example, some cryptocurrencies have billions of coins in maximum potential, but only a few million are currently in circulation. The rest of the supply is set to be launched at a later date. This makes the cryptocurrency artificially scarce and keeps its market value up in the long run.

Cryptocurrencies that do not have a burning mechanism attached to them have their value determined entirely by their utility. Let’s take a look at a few things the market cap of a cryptocurrency can tell us about.

Market Capitalization and Investment

The concept of market value works differently in the case of cryptocurrencies. You can use the market cap of a company to determine its overall value in the case of equities.

Moreover, even private organizations can make their own tokens as shares and make them available to a selected set of private investors. However, these companies are not traded publicly through an IPO.

By taking a look at market capitalization and calculating the earning ratio, an investor can easily determine if the investment they are making is good enough or not.

Investors can also make investment decisions based on the type of products accompany generates, the debt the company has to pay, the competition the company faces, the cash flow the company has access to, and whether the company is being managed properly or not.

Market Capitalization and Volatility

Out of the thousands of cryptocurrencies now in investment, Bitcoin is the only one that is not associated with a founder or company. While the founder of Bitcoin is suspected to be Satoshi Nakamoto, he is still to be found.

This means if you have to invest in any cryptocurrency other than Bitcoin, you will have lots of data to process and things to consider before you step into investing in that cryptocurrency. The actions of a cryptocurrency management team determine its market value and can influence it pretty quickly as well. It is just like being the founder of a large organization. Everything you say or do will determine the market capitalization of the cryptocurrency you have founded.

Cryptocurrencies with smaller market caps are subject to more price volatility than any other asset. That is because a low market cap means even a small investment can significantly impact the value of that cryptocurrency. However, cryptocurrencies with more than $10 billion market cap are more stable. But still, cryptocurrencies can always go in wild swings without any prior warnings.

Classification of Crypto Assets Based on Market Capitalization

Depending on the market capitalization of a cryptocurrency, it can be classified into one of the four basic types. This classification is done to make an investment into cryptocurrency easier for every investor by comparing different cryptocurrencies according to their market cap. This metric is used in creating cryptocurrency flow charts and graphs, which prove to be very helpful for new investors.

Let’s take a look at the four different classifications of crypto assets based on their market capitalization.

Micro Cap Cryptocurrencies

When compared to other types of cryptocurrencies, micro cap cryptocurrencies always have more price volatility because of their small market capitalization.

Usually, any cryptocurrency which has been recently launched and has a total market capitalization of less than $50 million are classified under this category.

Small Cap Cryptocurrencies

Small cap cryptocurrencies are the ones that have more market capitalization value than micro cap coins. This includes cryptocurrencies between $100 million to $1 billion in terms of market cap.

Even though these cryptocurrencies can quickly appreciate in value, they are still considered one of the riskiest investment options you can choose from since their market capitalization is still low. Dogecoin is one of the perfect examples of small cap cryptocurrencies.

Middle Cap Cryptocurrencies

The value range a cryptocurrency needs to have in order to fall into this category is between $1 billion and $10 billion. These cryptocurrencies are also unstable, and their volatility brings the perfect opportunity for huge returns for investors. However, they are still very risky to invest in.

If you invest in mid-cap cryptocurrencies, they can actually perform way better as compared to lower cap cryptocurrencies in the long run. You can use them to diversify your portfolio and increase your chances of getting huge returns. However, not every cryptocurrency which falls under this market cap bracket has the luck to become a big cryptocurrency someday.

You can take Litecoin as an example of mid cap cryptocurrency.

Large Cap Cryptocurrencies

Large cap cryptocurrencies are considered by investors as some of the most stable and great cryptocurrencies to invest in. That is because of the huge market capitalizations of these cryptocurrencies.

A big market cap does not only tell the investor about the number of trust people have in a cryptocurrency but also about the stability in the price of these assets.

Every cryptocurrency which surpasses the $10 billion market cap mark is considered a large cap cryptocurrency.

Investors are also intrigued to invest in large cap cryptocurrencies because they have lots of liquidity available. Because of their popularity, these cryptocurrencies can be bought at any crypto exchange on the internet.

You can take Bitcoin and Ethereum as examples of large cap cryptocurrencies.

Market Capitalization as a Trading Metric

Market capitalization is one of the most useful metrics you can use before investing in traditional markets; the story is different when you enter the realm of cryptocurrencies. Despite its clear uselessness, the market cap metric is still being used by a majority of investors looking to step into the cryptocurrency world with investment.

Just like it happens in the stock market, there are thousands of clueless investors looking to invest money in cryptocurrencies as well without even having a clue about the market and how it works. However, the danger of ignorance is that it causes irreversible damage, especially if you are an investor.

Most of the time, investors fail to analyze a cryptocurrency with logic primarily because of greed and crowd mentality. While market capitalization can be meaningful inside a traditional market, it has almost no importance in the crypto market.

It is basically used by masses to evaluate the total value of a cryptocurrency and can be used as an excuse to lure people into investing in a cryptocurrency without any knowledge.

But there’s a problem with the market cap. Since it is a very old metric, people have developed ways to abuse it and create fake value to lure more investors. It can be used to manipulate investors by artificially soaring the market cap of a cryptocurrency and can be used to scam millions of people worldwide. This makes market cap a dangerous tool for fraudsters in the case of the crypto market.

Since evaluating the actual benefit of investing in a cryptocurrency can be a complex process, investors usually try to find an easy way of justifying their interest in a coin, and the market cap is an easy escape for them. So, combine some greed and a few sensationalized headlines, and you’ve got yourself a perfectly proliferated market cap of any cryptocurrency.

Market Cap Doesn’t Represent Actual Value

Whenever you think about making an investment in some cryptocurrency, you must do proper due diligence to determine the actual value of the currency before you can invest in it. After you realize the actual value of a cryptocurrency, you can easily determine whether you want to invest in it or not.

One of the biggest problems faced by investors these days is that the market capitalization of a cryptocurrency showcases the price of that asset and not its value. Market cap is not, in many ways, a genuine representation of the total value of a cryptocurrency in the market. Many investors mistake this metric as a representation of the value of an asset, and this leads them to lose millions of dollars every year.

By considering market capitalization as only the price of a cryptocurrency, you understand that it is the money you pay to own a crypto asset, and that does not necessarily mean that you are going to get the same value back. People might be paying too much money for a cryptocurrency that actually has little to no functionality.

So, the price of acid has nothing to do with its value in the market. You do not proliferate the price of an acid beyond its value and get people to pay too much money for it for no actual reason.

Due to the overwhelming number of people willing to invest in the crypto market, almost every major cryptocurrency has increased in price many times in the last few years. It has made many people overnight millionaires. But, as an investor, you have to understand that an increased market cap does not add to the actual value of a cryptocurrency or any other asset for that purpose.

So, the actual question you should ask before investing in a cryptocurrency is how it is being used to develop new technology and how it is going to change the world forever.

Even if a cryptocurrency does not add any value to the market, investors might still be willing to pay more money to buy it. This will still cause the price of that cryptocurrency to soar, hence the increased market cap. Once this starts to happen, more investors who mistake market capitalization as an indicator of value start to invest in the same cryptocurrency, and the market cap keeps increasing.

So, you should understand that the market capitalization of a cryptocurrency is not connected to its actual value. Market capitalization is a simple metric that can be obtained by multiplying the market price of an asset by its total circulating supply. For an investor, market capitalization is a useless metric since it has nothing to do with the value of a cryptocurrency.

Purpose of Market Cap

As we have already mentioned above, the market cap is only related to the price of an asset and not its value. However, it is still mistaken as an indicator of value by many investors. In reality, the market cap is nothing more than the last market price of a cryptocurrency multiplied by its supply in circulation.

Since market capitalization is calculated by multiplying the money the last person paid to buy a cryptocurrency by the total supply of that cryptocurrency, it is a number that has no practical use in investments. The problem with the price of cryptocurrencies is that it always keeps changing, and the price of the next transaction might be higher or lower than the current price.

So, the market cap you calculate is valid for only a few seconds or even a fraction of a second. Even if the market cap was calculated by adding the money everyone paid at their own time of purchase, it would still be useless as it does not predict anything about the future transaction value of an asset.

Total Circulating Supply

One of the two things needed to calculate the market cap of a cryptocurrency is the total circulating supply of the coin in question. However, there are many serious issues with circulating supply calculation.

Circulating supply is the approximate number of tokens of a cryptocurrency that are available in the market for trade. However, the actual concept is not as easy as it seems to be. It is almost impossible to determine how many points of a cryptocurrency are actually available in the market from its market supply.

Since there are thousands and even millions of coins lost in locked wallets, no one can predict an actual and accurate number to represent the circulating supply of a cryptocurrency.

Moreover, if you put your cryptocurrency away in long-term deposits, it becomes illiquid and is excluded from the total circulating supply of the cryptocurrency. Therefore, even the coins which are not active in the market might be included in the circulating supply, and it is another factor that misleads lots of investors.

Takeaway

Market capitalization, or market cap, is calculated by multiplying the current market value of an asset by the total circulating supply of the same asset at any given time.

Also, the market cap has nothing to do with investments; many investors mistake it for the actual value of a cryptocurrency in the market. This leads to confusion and wrongly taken investment steps which ultimately hurt the portfolio of an investor.

So, market capitalization should only be used to calculate the total number of investments made into a cryptocurrency and should never be taken as an indication of the total value a cryptocurrency adds to the market. If you are an investor, you should learn to analyze cryptocurrencies with proper tools and metrics rather than relying on inaccurate estimates like a market cap.

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