If you’ve found yourself confused or curious whenever the term “market capitalization” comes up in one of our articles, here’s the tutorial you probably need.
Market capitalization is one of the most important metrics used to measure the stability or size of a crypto project. But there’s more to it. In this piece, we will help you fully understand what the term means, why the metric is so important, and how it all fits into the ever-growing crypto narrative.
- Market capitalization is a metric that tells you the entire value of a cryptocurrency. Simply put, it is the amount of money you’d have to spend if you were to, hypothetically, buy every single token of that crypto.
- Typically, large market cap coins like Bitcoin or Ethereum are considered to be relatively stable because it takes a lot of volumes to push prices up or down violently.
- While a regular market cap considers the circulating supply of the coin, a fully diluted market cap takes into account the maximum amount of tokens that can possibly exist for that crypto.
What is Market Capitalization?
Market capitalization is a metric that tells you the entire value of a cryptocurrency. Simply put, it is the amount of money you’d have to spend if you were to, hypothetically, buy every single token of that crypto.
And “market cap” is just a quicker way of saying “market capitalization”. Both of them essentially mean the same thing.
To calculate the market cap of any cryptocurrency, you need to know:
- The number of tokens of the crypto that are currently in circulation in the market, and
- The market price of a single token.
The mathematical product of these two metrics gives you the market cap of the cryptocurrency. In essence, the market cap of a coin like Bitcoin, for instance, is both influenced by the number of bitcoins currently circulating in the market, and the price of each bitcoin.
Why is Market Cap So Important?
The market cap represents the stability of a crypto coin as well.
Typically, coins that have a larger market cap, like Bitcoin or Ethereum, are considered to be relatively stable because it takes a significant market volume to push prices up or down violently. To put it metaphorically, large ships tend to weather storms in the market better.
Comparatively, it is much easier to move or manipulate the prices of altcoins, because even a small number of tokens can constitute a big portion of its overall market share. So while altcoins might react violently in a particularly brutal selloff, Bitcoin’s movements remain graceful.
Thus, the market cap, as a metric, is mainly used to:
- Make safe investments by identifying coins with a larger market share (because of their low volatility and a higher potential return); and
- Judge a coin’s relative size and impact, which will help determine investment opportunities.
Fluctuations in Market Cap
Market fluctuations affect the metrics of all cryptos. There’s a really simple reason for this.
Market cap is dependent on two variables—the supply of the coin and its price. So it goes up or down according to their performance.
Crypto markets, unlike stock markets, are open 24 hours a day. This means that the market cap fluctuates all day too. Additionally, most cryptocurrencies are also mined at regular intervals. Supply generally increases, and with it, so does the market cap.
Regular Market Cap vs. Fully Diluted Market Cap
A regular market cap refers to the value of a cryptocurrency with respect to the number of tokens currently in circulation. On the other hand, a fully diluted market cap takes into account both current and future tokens. In other words:
A fully diluted market cap calculates the value of a cryptocurrency at the current price with respect to the maximum number of tokens that can ever be in existence.
Let’s take the example of Bitcoin. On 9 March 2022, roughly 18.9 million BTC were being circulated. At approximately $42,143 apiece, Bitcoin’s total market cap stood at $800 billion at the time. However, Bitcoin’s maximum supply is 21 million tokens. So the fully diluted market cap stands at roughly $885 billion. Check the BTC to INR rate to see how much Bitcoin is trading at today.
The fully diluted market cap is thus always either equal to, or greater than the regular market cap of a cryptocurrency, depending on how many tokens are already in circulation. Buy Bitcoin at the best rate.
Other Market Caps
Cryptocurrencies are not the only assets that have market capitalizations. Stocks, gold, and even currencies have a market cap.
- Gold has a market cap of $12.8 trillion, which is one of the largest for any asset in the world.
- Apple’s market cap hit the $2 trillion mark a couple of years ago in 2020.
Now that you understand what a market cap is, here’s a fun fact for you:
The total market capitalization of the entire crypto market (including all coins and their current supply) is believed to be around $1.84 trillion. As much as $800 billion (44%) of that share belongs to Bitcoin only!
Ever wondered why cryptocurrencies are so volatile, while other assets like stocks and gold are not? This is because compared to them, crypto is still an emerging market. It is relatively easier for whales (large investors) to unfairly influence cryptocurrency markets because it takes a smaller amount of resources to do so.
Cryptocurrencies aren’t always going to be like this, though. As many more investors dip their toes into crypto and start buying, market caps will increase all around. And then the market will slowly start maturing and becoming more stable.
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Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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