In the ever-evolving world of cryptocurrency, market capitalization is a term that seems difficult for newbies to comprehend. However, from Bitcoin down to other altcoins, an understanding of how market cap works is essential as it gives a glimpse into the present and prospects of any cryptocurrency.
This article explains Market Capitalization and the terms associated with it in detail. Readers will also learn how market cap is calculated and how it should affect their investment decisions.
What is Market Capitalization?
Market capitalization is a simple way to determine how big and popular a cryptocurrency is. It represents the current total value of any cryptocurrency. It shows its size and potential for further growth in years to come.
Market Capitalization refers to a measure used to calculate and examine the current total value of a completely traded company or cryptocurrency. Market caps show analysts the significance of a company or cryptocurrency in the market. Market caps can also be referred to as the total value of each cryptocurrency mined.
Market cap is used to decipher how volatile or stable a cryptocurrency is. For instance, coins with less market cap are typically more volatile while those with larger market cap are more dominant and can survive minor liquidity crises.
How is Market Cap calculated?
The market cap of any cryptocurrency is calculated by multiplying the current price of a coin by the circulating supply.
Mathematically:
Current Price X Circulating Supply = Market Cap
Current Price refers to the present market trading price of each cryptocurrency.
Circulating Supply refers to the amount or quantity of each crypto that is currently released, being traded, and held by many wallets across the globe.
For example at the time of writing, the price of the Solana coin SOL is $95.5 with its circulating supply as 435,980,361 SOL.
To find its market cap:
$95.5 X 435,980,361 = $41,636,124,475.5
How Market Cap Affects Your Investment Decision-making
In addition to checking the current price and all-time high of a cryptocurrency before investing, examining the market cap of any coin you want to invest in is crucial. It helps in making better investment decisions with fewer risks associated.
To aid risk assessment, there are three (3) types of cryptocurrencies based on market cap:
- Small-Cap Cryptocurrencies:
These are cryptos that have a market cap of below $1 billion. These are most likely to crash in price with very small volatility issues.
- Mid-Cap Cryptocurrencies:
Mid-Cap cryptos have a market cap of between $10 billion and $1 billion. They can withstand the test of volatility and are believed to have higher chances of increasing in value and market cap with time.
- Large-Cap Cryptocurrencies:
This refers to coins and tokens with a market cap above $10 billion. To get to such an amount of market cap, they have scaled through the tests of time and many volatility issues. They also have higher liquidity with many investors already on them.
On the other hand, while a large market cap may indicate that a cryptocurrency is mature, it may also mean that its investment yield may be low since it has already grown significantly over the years. Investing in mid or small-cap cryptocurrencies may have promising returns but is still risky given that there’s no certainty of surviving higher volatility issues.
Additionally, the market cap determines how realistic it is to attain some price targets. For instance, Many believe that Shiba Inu will get to $1. Yet, calculating the current circulating supply by the future price may determine whether the target is realistic. Using the earlier provided metrics provides clear numbers
Circulating supply X Future price = Future Market cap
$589,290,011,718,310 X $1 = $589,290,011,718,310
Attaining such an amount of market cap is unrealistic as it is even more than the size of the global cryptocurrency market cap, and indeed the global stock market
Fully Diluted Value (FDV)
Fully Diluted value refers to the total worth of a cryptocurrency if all of its minted quantities are in circulation. For example, Bitcoin has a maximum supply of 21 million. The FDV of Bitcoin refers to what its value will be if all the 21 million have been minted and are already in circulation.
To get the FDV of any cryptocurrency, the current price is multiplied by the total supply of that particular crypto.
Total supply refers to the specific quantity of each coin that has been minted and is meant to exist.
For Bitcoin. At the time of writing, it’s trading at $40,000’ so to calculate its FDV:
40,000 X 21,000,000 = 840,000,000,000
Total Market Cap
Total market cap refers to the real-time value of all cryptocurrencies currently in circulation as listed by price tracking websites. At the time of writing, the global cryptocurrency market cap is $1.73 Trillion. It is also noteworthy that NFTs and the Metaverse are not part of this calculation.
Conclusively, although all coins are prone to volatility, reviewing the market cap of any cryptocurrency is a very important factor to consider before making investment decisions.