Discover what crypto market cap is, why it matters, and how to use it to make informed investments. Learn about categories & circulating vs total supply.
Cryptocurrency investing can be exciting yet challenging for some users, especially if you're new to the space. There will be a number of terms and metrics you'll encounter while you evaluate different tokens and one of the most common ones is "market cap." But what does it mean when looking at various tokens, and why is it so important?
This article looks to provide information about what crypto market cap is, how it's calculated, and why it should play a significant role in your investment decisions. We'll also discuss different types of metrics and address how each value relates to circulating versus total supply. By the end, you'll be able to understand how to use this metric when looking at crypto assets.
Market capitalization (or "market cap") is a key metric used to determine the total value of a cryptocurrency in the market. It represents the combined value of all coins or tokens that are currently in circulation. Essentially, market cap helps investors compare the relative size and worth of different cryptocurrencies.
To calculate market cap, simply multiply the current price of a token by its circulating supply. This gives you the total market value of that cryptocurrency.
The concept of market cap is widely used in other markets, such as equities and commodities, as a way to easily compare the size of assets across various sectors.
Market cap is calculated by multiplying the current price of a cryptocurrency by its circulating supply. It's worth noting that the circulating supply is not the same as the total supply. For example, if Bitcoin's price is $100,000 per coin and has 19 million BTC in circulation, its market cap would be $100,000 × 19,000,000, resulting in a value of $1.9 trillion.
Compared to stocks, where most shares are in circulation, not all cryptocurrencies are in circulation. The market cap of a token has to be calculated using the circulating supply to get an accurate valuation rather than the total supply. A total supply of tokens might be higher, although tokens might not have been minted or mined, or they are locked in smart contracts.
A straightforward calculation similar to the one above lets users quickly rank tokens and understand how their market cap ranks are compared to the overall value in the market.
Understanding market capitalization is key, as it better reflects a project's overall valuation and popularity, rather than just the token's price. In crypto, the market cap is a more accurate indicator of a project's worth, as the price of a token alone doesn't directly correlate to its monetary value.
Token prices can vary depending on how many tokens are in circulation. For example, PEPE has 420.69 trillion tokens in circulation, with a price per token of $0.00002056 as of this writing. When comparing it to AAVE, which has a circulating supply of approximately 15 million and a price of $334 as of this writing, it might seem like AAVE is more expensive due to its higher token price.
However, this isn't necessarily the case. A high token price doesn’t always reflect a project's popularity, as it doesn’t account for the bigger picture. When you look at the two tokens in terms of market cap, PEPE's value is actually higher than AAVE's, indicating that there's greater investment in PEPE, or simply fewer sellers willing to sell.
Moreover, tokens with higher market caps (such as Bitcoin or Ethereum) are generally more stable and less susceptible to high volatility spikes than smaller-cap coins. That said, stability can be ideal when looking for more stable investments.
Cryptocurrencies are typically grouped into three categories based on their market cap. Each category has distinguishing characteristics, including potential risk and reward levels. Here's a closer look:
Large-Cap Cryptocurrencies
Large-cap cryptocurrencies have a market cap of over $10 billion, with examples such as Bitcoin, Ethereum, and even USDC. What sets these apart is that they're seen as safer investments due to their established positions in the market. They've even been onboarded by traditional financial institutions and vouched for. Though they offer lower growth potential, they are less likely to experience extreme price swings.
Mid-Cap Cryptocurrencies
Mid-cap cryptocurrencies typically have market caps between $10 billion and $1 billion and are considered altcoins by many. Some of the more popular examples include Polygon, Chainlink, Litecoin, and other blockchains.
These projects are established in the market, and their market cap has increased due to the demand for the token's utility. These projects often represent stronger potential for growth as they are still maturing businesses with innovative technologies. However, they carry medium-level risks due to their more limited adoption than large-cap assets.
Small-Cap Cryptocurrencies
Small caps are cryptocurrencies with market caps under $1 billion.
Examples include newer projects or niche tokens with smaller communities.
While these assets can yield significant returns in bullish cycles, they are the most volatile and riskiest investments. Proper research is essential before speculating in small-cap cryptocurrencies.
Understanding where a cryptocurrency falls in this spectrum is key to assessing risk versus reward when building your portfolio.
When assessing market cap, it's essential to grasp the difference between circulating supply and total supply:
H3 What Does Crypto Market Cap Tell You?
The crypto market cap shows the overall market value of a cryptocurrency, helping you assess its size, its popularity among investors, and its propensity to be less volatile when compared to lower capped assets. It's a helpful metric for ranking cryptos and comparing them across the market.
H3 Is High Market Cap Good?
Yes, a higher market cap coin indicates a token that's popular among crypto users and investors but doesn't always indicate its utility. A higher market cap token can be less volatile than micro-cap tokens, that can see significant volatility spikes. For many, a higher market cap token is a safer investment with possibly a more predictable pricing pattern.
For everyone who seeks exposure to the crypto market, understanding market cap is an essential subject to understand. Whether users are using it to compare the size of two tokens or want to understand the value of a low market cap asset, understanding its market capitalization is a better indication that looks beyond a token's price and considers all stakeholders in the asset.
Market cap is the first point of reference when assessing the validity of your own hypothesis. Still, it should be combined with other metrics, such as circulating supply, project fundamentals, and market trends, to build a well-rounded strategy.
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Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.