How does market capitalization help me be a better investor? Cryptocurrency is highly volatile, no doubt. Because of the market's volatility, investors need to perform their due diligence before making investment decisions. And one of the ways to do this is using the market capitalization metric. Market capitalization is a significant metric in making investment decisions. In addition, it provides you with an overview of a crypto coin. So what does market cap mean in crypto, and how do we calculate it? So without more ado, let's dive in!
Market capitalization in the stock market is the total monetary value of a publicly traded company. However, in cryptocurrency, the market cap is the total dollar value of all coins already mined (circulating supply). Although it's not the only metric for making investment decisions, market capitalization lets investors know superficially if a crypto investment is worth it or not.
In the financial market, the worth of a publicly-traded company has a significant effect on investment decisions. That's because stock market analysts believed that the more valuable a company is, the more stable and the less volatile it will be. Plus, more investors trading its shares means the company's stock price manipulation is impossible.
If you want to calculate the digital currency's market cap, multiply the total digital coin in circulation with the current price of a single coin.
Market capitalization = total coin in circulation x current price of the cryptocurrency
For example, if Coin A has 50 million digital coins with a price of $10, then the market cap of Coin A will be:
50 million x $10 = $500,000,000
Now, for a better understanding of market cap calculation, let's calculate the market capitalization of Ethereum.
The total circulating supply of Ethereum = 116,990,284.21
Unit price or current market price of Ethereum = $2,769.90
Market Capitalization of Ethereum = 116,990,284.21 x $2,769.90
= $324.05 billion
There are three categories of cryptocurrencies by market cap — Large, Medium, and Small market capitalization. Knowledge of these categories can help investors make informed decisions. Here are further explanations of the market cap categories.
Large market cap coins include cryptocurrencies that have a market value of over $10 billion. Cryptocurrencies that fall within this category are Bitcoin (BTC), Dogecoin (DOGE), Cardano (ADA), Tether (USDT), Binance coin (BNB), and several more. They have a record of steady growth, high market dominance, low competition, high volume of trading, and low volatility (but not as low as the traditional stock market).
Investors consider crypto assets in this category as safe and conservative because of their large user base. They're also less prone to manipulation. As a result, large-cap cryptocurrencies are suitable for long-term investment.
Cryptocurrencies that fall within this category have a market value of between $1 billion to $10 billion. Thus, they're between the small and high cap risk/return spectrum. Medium Market Cap cryptocurrencies have a higher growth potential than those in the large-cap market and are less risky than those in the small capitalized market category. Examples of mid-cap cryptocurrencies include Ethereum Classic (ETC), Polygon (Matic), Solana (SOL), and Litecoin (LTC).
Digital coins in this category have market capitalizations of less than $1 Billion. They are high-risk investments, but they can also yield huge returns because of their high growth potential. These cryptocurrencies have a low trading volume that makes them not likely to be listed on Centralized Exchanges (CEX). That means you can only trade them on Decentralized Exchanges (DEX) like MatrixSwap. This category's market cap coins are also highly volatile and vulnerable to market manipulation because of their low user base. Cryptocurrencies in the small market cap categories include Thorchain (RUNE), Harmony (ONE), Bancor (BNT), Digibyte (DGB), and many more.
As discussed above, the market cap is a significant metric to determine the dollar market value of a digital coin. This information enables investors to make informed investment decisions, even if they know little about the investment vehicles.
Here are three reasons why market cap is important in cryptocurrency:
Launched in 2009 by Satoshi Nakamoto, Bitcoin is a peer-to-peer digital currency that eliminates intermediaries from transactions. As the pioneer of the cryptocurrency network, bitcoin is currently the largest in terms of market capitalization. Currently, Bitcoin has a market cap of more than $400 billion.
Ethereum, referred to as the world computer, is a blockchain platform co-created by Vitalik Buterin, Gavin Wood, and eight others. It was launched in 2015 to become a global decentralized blockchain platform for decentralized applications (Dapp). It is the second-largest cryptocurrency after Bitcoin and has a market value of over $200 billion.
Unlike the previously mentioned two cryptocurrencies, Tether is a stable-valued coin pegged to the US Dollar. Thus, it aims to serve as a stable "haven" for crypto investors during high volatility in the cryptocurrency market. It's currently the third-largest cryptocurrency after Bitcoin and Ethereum. Tether has a market cap of over $50 billion.
Binance Coin is an exchanged-based token launched by Binance, one of the largest centralized cryptocurrency exchanges in the world. Binance Coin (BNB) serves as the native digital asset of the exchange and is used primarily for transacting between Binance users. It has a market value of over $50 billion.
With a market capitalization of over $30 billion, Cardano is one of the largest cryptocurrencies that successfully use the Proof of Stake (PoS) consensus mechanism. Founded in 2017 by Hoskinson and Wood, Cardano aims to address all the problems of Ethereum and be a scalable solution to support global systems.
Ripple is a crypto coin that runs on Ripplenet, an open-source distributed ledger. XRP has a market capitalization of over $25 billion and is a speedy, less expensive, and scalable alternative to traditional payment platforms and other cryptocurrencies.
Popularly referred to as "meme coin," Dogecoin is an open-source digital currency created by Billy Markus and Jackson Palmer. It was forked from Litecoin and described as "a fun, lighthearted cryptocurrency." Unlike other cryptocurrencies, its total supply is uncapped, and it currently has a market cap of over 20 billion.
Like Tether, USD Coin is also a stable coin pegged to the US dollar. Co-founded by Coinbase Exchange and Circle, USDC offers price stability to investors and traders. Its market value is more than $25 billion.
Polkadot is an open-source multi-chain protocol that offers cross-chain operation between different blockchain technology. This blockchain offers interoperability that makes it easier for diverse blockchain protocols to share information and transaction. Founded by the Web3 Foundation, DOT has a market cap of over $12 billion.
Binance USD is a stable coin created by the Binance crypto exchange. It was launched in 2019 and regulated by the New York State Department of Financial Services (NYSDFS). The coin has a market cap of $11 billion.
UniSwap is a decentralized exchange protocol on the Ethereum blockchain. Created in 2018 by Hayden Adams, this platform is an example of an Automated Market Maker (AMM) and aims to automate crypto trading. UNI's market capitalization at the time of writing this content is over $9 billion.
Bitcoin Cash was hard forked from Bitcoin in 2017. This crypto project is also permissionless and decentralized. It aims to be more scalable than Bitcoin. This digital currency has a market cap of over $8 billion.
Created in 2011 by Charlie Lee, Litecoin is a digital currency based on the bitcoin protocol. Its market cap is more than $8 billion. Just like Bitcoin, it aims to be fast and secure. In addition, its low transaction fee makes it a suitable choice for Point-of-sale (POS) and micro-transaction.
Co-founded in 2017 by Sergey Nazarov, Chainlink is a Major player in the data processing field and built on an abstraction layer in the blockchain protocol. It's the first blockchain network that allows the integration of off-chain data into smart contracts. Chainlink's market cap is around $7 billion.
Solana is an open-source Decentralized Finance (DeFi) project on blockchain technology. It aims to facilitate Dapp creation through its scalability. It employs both Proof of History (PoH) and Proof of Work (PoW) consensus. Solana has amarket cap of around $7 billion.
Wrapped Bitcoin is a tokenized version of Bitcoin on the Ethereum blockchain. This project allows bitcoin to comply with ERC-20 so bitcoin can be integrated and used on the Ethereum blockchain.
Polygon is a layer-2 scaling solution that transforms Ethereum into a multi-chain blockchain. This cryptocurrency project uses Proof of Stake (POS) architecture and plasma framework for scalability and easy execution of the autonomous Smart contracts on the Ethereum blockchain.
Ethereum Classic is a hard fork of Ethereum, launched in 2016 by Vitalik Buterin and Gavin Wood. Many people question the differences between Ethereum vs. Ethereum Classic, but what it mainly boils down to are people's ideologies. The primary aim of Ethereum Classic is to preserve the original history of Ethereum because many believe that it is still a worthy investment.
Stellar is a cryptocurrency project with over $5 billion in market cap. It aims to be a platform for moving and storing money. Stellar also serves as a bridge that connects traditional financial services.
Theta is a blockchain-powered video streaming service. It's aimed to shake up the centralization and the poor infrastructure of the video streaming niche. Co-created by Steve Chen, the co-founder of YouTube, and Justin Kan, the co-founder of Twitch. Its current market capitalization is over $5 billion.
Cryptocurrency trading is a high-risk investment that needs careful planning and research. That means an understanding of different metrics (like market cap, tokenomics, intrinsic value, and use cases) and trading strategies lets you make smarter investment decisions. With this article, you now understand what cryptocurrency market capitalization is and how to calculate it.