Market capitalization, or market cap for short, is a common term used in reference to cryptocurrency. Although it may sound like a cumbersome concept to wrap one’s head around, it is actually very straight forward. Simply put, market cap is calculated by multiplying the circulating supply of a coin by its value per coin.
To provide further context, let’s briefly go over how Bitcoin’s market cap is calculated. At the time of writing this article, there are 16,952,450 Bitcoins in circulation. This figure is not to be confused with the 21 million total supply of Bitcoin, which is not a figure used when it comes to calculating market cap.
The current market value of Bitcoin would be, at the time of writing this article, approximately $6850. We’d go about calculating market cap as follows:
Circulating Supply (16,952,450) x Value Per Coin ($6850) = Bitcoin Market Cap ($116,124,282,500)
Market Cap – Is it really important?
Overall, market cap should be considered important to investors. Although it has its drawbacks, it provides valuable information when it comes to researching individual coins, comparing two or more coins, and researching cryptocurrency’s performance as a whole.
Supply and Demand Insights
Market cap provides a useful metric for tracking the broad performance of any given cryptocurrency. With both variables behind the calculation of market capitalization changing frequently (price more-so than circulating supply), tracking market cap can provide some insights in regards to the supply and demand of a particular coin.
Determining Relative Value
It is arguably one of the best metrics to use when comparing coins to one another. Cryptocurrencies have a wide variation of circulating supplies and values. Comparing any one of these individual metrics just doesn’t work out, such as comparing the price per coin of Ripple (XRP) to Bitcoin (BTC). Comparing market caps is as good as it gets when it comes to determining relative value.
Determining Market Dominance and “Market Share”
By tracking the entire cryptocurrency market’s capitalization, we’re able to gain insights on important metrics such as Bitcoin dominance and “market share” over time. Bitcoin dominance refers to which percentage of the entire cryptocurrency market cap that is accounted for by Bitcoin. This number changes over time and provides insights in to market sentiment and altcoin performance.
To provide some context, lets examine this chart of total cryptocurrency capitalization. We can see that over the past 2 years, Bitcoin’s dominance (represented by orange in the chart) has fallen from roughly 80% to under 50%. This suggests that altcoins have seen significant growth during these 2 years at a higher rate than Bitcoin’s growth.
The other colors in the chart provide context as to how other coins’ market shares fluctuate over time. Again, a very useful metric in terms of sentiment and defining trends.
Drawbacks and Misconceptions in Regards to Market Cap
Market Cap Does NOT Represent the Amount of Capital Invested
It is important to note that market cap does not represent the amount of capital that has been invested in to the markets. Market cap is simply a calculation based on the variables previously discussed, circulating supply multiplied by value per coin. Actual capital invested into the markets is not something that can be calculated in any way, shape, or form using market capitalization, with the possible exception of stablecoins.
Market Cap CAN be Manipulated
Building upon the previous point, it is important to understand how easily market cap can be manipulated. Especially when it comes to cryptocurrencies with a smaller market cap. As market cap isn’t tracking actual value invested, all it takes for market cap to be manipulated is to fabricate the value of a coin. This can be done in many ways which we won’t go into in this article, though it is important to note that in a smaller market with low volume, individual trades will have a higher impact on the price. If two individuals agree to trade with one another in a manner that is going to artificially inflate value per coin, this will also reflect in said coin’s market cap.
Market cap certainly is an important figure number to keep track of and it provides many facets of perspectives when it comes to examining the market. Understanding what market cap represents and implies enables investors to make the most out of the information it supplies. One should also be aware of the drawbacks and misconceptions in regards to market cap so that they are taking these in to account when conducting research/analysis.