Even if you’re familiar with Bitcoin, you might still find yourself puzzled by the concept of ‘cryptocurrency capitalization.’ What does this term really entail? As the world of digital currencies continues to evolve, understanding the nuances of market cap in crypto becomes increasingly vital.
In this article, we’ll explore the intricacies of cryptocurrency market capitalization, delving into what it signifies and the key factors that shape it. This insight is crucial for anyone looking to navigate the often complex and dynamic terrain of cryptocurrency investment.
What Is Market Capitalization?
Market capitalization, commonly referred to as market cap, is a pivotal indicator in both the stock and cryptocurrency markets, representing a company’s or a digital asset’s total value.
In the stock market, it is calculated by multiplying the company’s current share price by its number of outstanding shares, reflecting the total market value of a company’s equity. Market cap serves as an essential metric for investors and analysts, offering a gauge of a company’s size, financial stability, and market worth. This calculation enables easier comparison between companies and assists investors in making informed decisions aligned with their risk tolerance and investment objectives.
In the cryptocurrency market, market cap similarly matters greatly. Determined by multiplying the current price of a cryptocurrency by its circulating supply, this metric provides a snapshot of a cryptocurrency’s relative size and market dominance. Just as in traditional markets, crypto market cap is instrumental for understanding a digital asset’s value and position within the broader market landscape.
Public companies and cryptocurrencies are often categorized into groups based on their market capitalization. Large-cap entities boast market caps over $10 billion, mid-cap companies fall between $2 billion and $10 billion, and small-cap companies are those with a market cap below $2 billion. These classifications indicate not only the size but also the potential growth trajectory and stability of these entities. Large-cap stocks typically represent more established, stable companies, whereas small-cap stocks might be associated with higher growth potential but also greater risk.
Market cap in both domains also sheds light on the entity’s stage of development. The established nature of large-cap stocks and cryptocurrencies contrasts with the dynamic and potentially more volatile nature of their small-cap counterparts. Later in this article, we will delve deeper into comparing market cap implications in the stock market with those in the cryptocurrency world, highlighting key similarities and differences. This comparison aims to provide a comprehensive understanding of how market cap functions across different financial landscapes.
How Is Market Cap Calculated?
Market cap is a lot less complicated than it sounds. Let me give you an example of the market capitalization rate. Imagine that there is an organization that emitted 1,000,000 tokens, all of them in circulation. One token costs $5. In order to assess the value potential of the entire company, we need to make the following calculation: multiply the total number of its shares (tokens) by the price of one asset. 1,000,000 × $5 = $5m.
A large market cap in cryptocurrency can indicate either a high cost of one coin or a large number of coins in circulation. The growing cryptocurrency market capitalization is an important aspect for potential investors. It proves that crypto is developing, and digital money is becoming an increasingly popular means of payment.
Yet, we should note that it is impossible to estimate the value of virtual coins because there is no way by which their actual value can be fixed — their price is not bound to gold or any other physical asset. For this reason, there is also no way to identify the real ratio of cryptos that are still functioning and those that have been lost. After all, cryptocurrency can disappear due to collapsed servers and network issues.
However, the market capitalization of cryptocurrencies is not the only parameter worth attention. The trading volume for a certain period of time is also important. Additionally, factors like liquidity, price volatility, the technology underlying the cryptocurrency, regulatory updates, and community engagement play pivotal roles in shaping trading strategies and investment decisions.
What does market cap depend on?
When it comes to cryptocurrencies, market capitalization is entirely dependent on fluctuations in the exchange rate and the activity of market players. The total amount of crypto remains pretty much unchanged.
Given the fact that the capitalization of cryptocurrencies depends on the exchange rate, we can say that the level of demand also affects it. The more actively people are interested in a particular digital currency, the higher its value and capitalization. The cost of crypto assets is defined by the following aspects in particular:
- activity of large players on exchanges
- innovative technologies in the field of crypto
- opinions of authoritative people, conclusions of analysts, experts, financial influencers, etc
- regulations that govern the status of Bitcoin and other cryptos
- news regarding virtual coins
Crypto Market Cap vs Stock Market Cap
The term ‘market capitalization’ initially originates from the securities exchange. To grasp the difference between market cap in stocks and crypto, you need to understand how stocks work.
Owning stock in an organization renders you a portion of its proprietorship. Possession comprehensively implies two things:
- having the right to a part of the company’s future income distributed as dividends
- receiving a proportionate amount of proceeds in case the company is sold
The all-out estimation of the considerable number of offers is the market cap of the organization. The organization’s market cap is a gauge of its present capacity to deliver income and its potential for development. A huge level of an organization’s stock is held by the originators and other large investors.
When it comes to cryptocurrency, a huge part of tokens is held by people outside of the project and by whales who simply gobble them for further passive storage in their wallets.
What’s the difference then?
A large portion of these stocks deliver profits. Along these lines, the stocks that the proprietors will have will procure them profits, which will weaken the stocks claimed by different investors. But it’s not the case with cryptocurrencies. At the point when a whale accumulates tokens in their wallets, it just stays there. The rest of us would not forget about such sums on our wallets, would we?
Another major difference between cryptocurrencies and traditional securities (e.g., stocks) is the inability to accurately determine the real capitalization. The thing is, it is impossible to calculate how much cryptocurrency is actually available to investors and what amount has been left forever on user accounts as a result of password loss or erroneous transfers to incorrect addresses (which is irreversible).
What Is a Diluted Market Cap?
Diluted market cap is a critical indicator of a company’s comprehensive market value. It not only accounts for the current outstanding shares but also includes potential future shares or tokens that might be issued, often due to convertible securities like stock options or convertible bonds. Calculating diluted market cap involves considering both existing shares and potential shares from convertible securities, offering a more complete view of a company’s value.
This approach is particularly crucial because issuing new shares or tokens can dilute the value of existing ones, impacting the company’s market cap and potentially affecting shareholder value. Therefore, companies with a significant number of unissued securities or tokens bear the risk of future dilution, which is a concern for investors when assessing a company’s market cap.
Misconceptions About Market Caps
It’s vital to clarify that market cap doesn’t directly reflect a company’s equity value. Rather, it’s a calculation involving the current market price and the total number of outstanding shares. A common misconception is that a company with a high market cap is always overvalued, while a company with a low market cap is always undervalued. However, market price, influenced by supply and demand, may not always align with a company’s intrinsic value. To truly understand a company’s worth, one must delve into its fundamentals — revenue, earnings, assets, and liabilities. These aspects provide a comprehensive insight into a company’s value beyond just its market cap.
What Does a High Market Cap Tell You?
A high market cap typically signifies a company’s strong market presence and often correlates with lower investment risk. These companies, usually industry leaders, are known for their stability and established track records, attracting investors seeking safer investment avenues. Despite potentially lower growth prospects compared to smaller companies, high market cap companies often have advantages like lower financing costs and strong brand recognition. Their size also tends to draw institutional investors, increasing market visibility and share liquidity. In essence, a high market cap indicates a robust, well-established company, generally seen as a safer, more stable investment choice.
Market Cap Categories
Market cap categories refer to the classification of companies based on their market capitalizations. Market cap, calculated using the market cap formula that typically involves multiplying the current price by the outstanding shares, is used as an indicator of a company’s size and can be a helpful tool for investors when analyzing investment opportunities. These categories provide insights into the stage of growth of the companies and their future growth potential. Companies can be classified into different categories based on their market cap, such as small-cap, mid-cap, and large-cap, each offering varying degrees of aggressive growth potential and above-average returns.
In the cryptocurrency world, market cap categories are framed similarly to those in the stock market but adjusted for the smaller scale and higher volatility of the crypto market, impacting the future prospects of financial assets in this domain.
Large-cap cryptocurrencies are the giants of the crypto world, their market capitalizations generally exceeding $10 billion. This group includes the most established and well-known cryptocurrencies like Bitcoin and Ethereum. Considered safer bets in the volatile crypto market, they attract long-term investors looking for stability in their diversified portfolio and consistent performance relative to the major indices.
Moving a step down, mid-cap cryptocurrencies, which have market caps between $1 billion and $10 billion, offer a balance. These are cryptocurrencies that have shown significant growth and have room for further expansion. They are less established than their large-cap counterparts but have caught the eye of investors willing to take on moderate risk for potentially higher returns. This category is often watched for emerging leaders in the crypto space, signaling a critical stage of growth.
With market caps under $1 billion, small-cap cryptocurrencies are at the other end of the spectrum. These are the high-risk, high-reward segment of the crypto market, often comprising newer or less-established cryptocurrencies. Investors attracted to this category are usually comfortable with high risks, hoping to find the next big crypto star before it soars, aligning with a shorter time horizon and readiness for dramatic changes in market valuation.
Then there are micro-cap cryptocurrencies, usually valued at less than $50 million. This territory is for the speculative and the brave, dealing with very new or obscure cryptocurrencies. The risks here are magnified, including higher chances of scams and project failures, but so are the potential rewards for those who bet right, seeking rapid and aggressive growth potential.
Finally, a less common but interesting category is mega-cap cryptocurrencies. This isn’t as widely referred to in crypto discussions but, when used, typically points to the behemoths like Bitcoin and sometimes Ethereum. These cryptos dominate the market to such an extent that their movements can influence the entire crypto space.
In summary, the crypto market mirrors traditional market cap categories but adapts them to its unique scale and volatility. From the relative safety of large caps to the wild frontiers of micro caps, these categories offer investors a way to understand where a cryptocurrency stands in the broader market landscape, aiding them in making informed decisions based on their financial goals and time horizons.
Is It Better to Have a Large Market Capitalization?
Large market capitalization brings a mix of benefits and challenges. High market cap companies enjoy perks like favorable financing conditions and operational efficiencies due to their size and established market presence. They’re in a better position to negotiate with suppliers and can benefit from economies of scale. However, being large isn’t without its drawbacks. Growth often slows down as companies expand, and larger corporations might struggle with innovation and agility, potentially missing out on new market opportunities. Thus, while a large market cap provides certain advantages, it’s accompanied by growth limitations and the challenge of maintaining flexibility in a dynamic market environment.
How Can Market Cap Influence Investment Behavior?
Do not confuse the market cap of Bitcoin with its cost — these are different concepts, even though they are interconnected: a drop in capitalization leads to a decrease in cryptocurrency price, and, correspondingly, crypto price growth leads to an increase in capitalization. Why?
The price of cryptocurrencies is mostly based on faith: as investors watch capitalization grow, they understand that demand is increasing and exceeding supply. If someone invests considerable money, the price of crypto will increase, so it’s better to buy it as early as possible, which will further drive the demand.
Crowds of minor speculators and trading robots accelerate this process by creating the snowball effect until some important event occurs and changes the situation or until large players begin to fix their profits. This is where the trend gets broken.
Why is market capitalization a secondary aspect in cryptocurrency trading?
The market capitalization indicator reflects neither the real value of an individual cryptocurrency nor the market as a whole. Here’s why:
- The numbers coincide with reality only if all issued coins have been sold, and this is almost impossible.
- It is often impossible to audit the companies behind the issue of tokens, and cryptocurrency is supported only by investors’ money.
- Issuers often leave funds for themselves: such coins are not backed up by anything, and their amount might be unknown.
In this regard, stablecoins remain the most transparent since their issuers (for example, Circle, the developer of the USDC cryptocurrency) regularly perform official audits. According to the reports, 4 billion crypto-dollars behind this digital money are stored in real bank accounts. For other currencies (including Bitcoin), market capitalization is no more than a nominal number — the multiplication of the amount of currency by the stated price.
If we decide to perform the calculation of the total cryptocurrency market capitalization, the task becomes even more confusing. The problem is that the figures get distorted not only by the aforementioned factors but also by Bitcoin: it becomes the intermediary between the investor and the currency.
Investments in the market are made and calculated in dollars, but one cannot pay for all cryptocurrencies in them. Many altcoins are still only traded in conjunction with Bitcoin. To acquire them, an investor first buys Bitcoin (which increases the market capitalization of BTC) and then invests Bitcoin in the altcoin, thus increasing the capitalization of the latter.
Cryptocurrency market capitalization is a basic parameter that reflects the total value of all virtual money in circulation. Roughly speaking, this is a kind of indicator of the market power of a cryptocurrency.
If you are thinking about investing in cryptocurrency, be sure to consider market cap. Minor currency price fluctuations cannot affect the company with a high level of capitalization. At the same time, assets that have a low market capitalization may exhibit rather serious fluctuations over short periods of time.
Disclaimer: Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about the completeness, reliability and accuracy of this information. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.