What is market cap?

Date :

One of the most important factors that investors consider when evaluating a cryptocurrency is its market capitalization (market cap). In this article, we will delve into the concept of market cap, how it’s calculated, and why it matters for those considering investing in cryptocurrencies.

What does Market Cap mean?

The term market cap, short for ‘market capitalization’, represents the total value of all the outstanding units of a particular cryptocurrency at a given point in time. It provides a comprehensive snapshot of a crypto-asset’s current market position and can be a useful indicator to measure its relative size compared to other cryptocurrencies or traditional assets such as stocks.

Calculating Market Cap

Calculating the market cap of a cryptocurrency is quite simple: it involves multiplying a coin’s current price by its circulating supply, which is the total number of coins currently available in the market. Mathematically, it can be represented as:

Market Cap = Current Price x Circulating Supply

You will easily find the cryptocurrency marketcap on coinmarketcap.com

MarketCap Bitcoin

Comparing Different Cryptocurrencies Using Market Cap

With thousands of different cryptocurrencies out there, their diverse market caps can help investors gauge the overall standing of individual coins relative to one another. It is important to note that not all cryptocurrencies aim to solve similar problems or serve identical purposes. By comparing their market caps, potential investors can gain insights regarding which currencies are attracting more attention and investment. Needless to say, a higher market cap often signifies a greater level of trust among participants within a market.

Different Market Cap Ranges and Their Implications

It is not uncommon for investors to categorize cryptocurrencies into separate groups based on their market caps. This classification can help them understand the risk-reward ratio associated with each group.

1. Large-Cap Cryptocurrencies

Cryptocurrencies with a market cap of over $10 billion are typically considered large-caps. These coins have established themselves in the market, usually demonstrating greater stability and lower risk than their mid or small-cap counterparts. Major cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) fall under this category. Investors often consider these digital assets as more reliable investment options, especially when taking long-term positions.

2. Mid-Cap Cryptocurrencies

A mid-cap cryptocurrency generally has a market cap ranging from $1 billion to $10 billion. Coins within this category have showcased some degree of market maturity, but they still face challenges in terms of adoption and use-case validation. The risk profile for mid-cap cryptos tends to be higher compared to large-cap ones, which makes these coins suitable for investors with moderate risk appetite who are looking for potential high returns. Some examples include Cardano (ADA), Chainlink (LINK), and Stellar (XLM).

3. Small-Cap Cryptocurrencies

Cryptocurrencies with a market cap below $1 billion are categorized as small-caps. Investing in these digital-assets involves considerable risks, mainly due to their unproven track record or limited user base. Nonetheless, some investors take the gamble as certain small-cap cryptocurrencies may offer extraordinary returns if they succeed in gaining significant adoption or provide a strong solution to an existing problem. However, rationale decision-making is essential when venturing into this space since the odds of failure can be considerably high.

Why Market Cap Matters to Investors

An understanding of market cap is crucial for anyone considering investing in cryptocurrencies. Here are a few reasons why:

Evaluating Investment Risk

Market cap plays a critical role in assessing the risk associated with an investment. It helps potential investors determine whether a cryptocurrency might be prone to price volatility or if it has enough liquidity to ensure that they can enter and exit positions without causing significant changes to the market value. In general, large-cap cryptocurrencies offer lower risk but may also provide moderate returns while small-caps present higher risks alongside the possibility of potentially exponential gains.

Diversification within Crypto Portfolios

By factoring in the market cap of various cryptocurrencies, investors can create a balanced portfolio that aligns with their risk tolerance levels. For instance, a prudent investor may maintain a majority holding of large and mid-cap cryptocurrencies, complimented by a smaller allocation of small-cap digital-assets that have promising prospects.

Better Decision-Making

A comprehensive assessment of a cryptocurrency’s market cap contributes towards informed decision-making. When combined with other factors such as project development progress, use cases, and team competency, investors stand a better chance at forecasting future trends and making optimal choices.

Limitations of Relying Solely on Market Cap

Although market cap serves as a valuable metric when gauging the overall status of a cryptocurrency, it should not be the sole basis for investment decisions. There are some limitations to using market cap as the only measure:

  1. Manipulation: The crypto market, especially altcoins with relatively low market caps, can sometimes be susceptible to manipulation through a practice known as “pump and dump.” In such cases, the market cap of a specific coin can experience rapid fluctuations that may not be indicative of its true value.
  2. Circulating Supply Assumptions: The calculation of market cap relies on the circulating supply of a cryptocurrency, which may not always accurately reflect its actual availability. Factors like lost or inactive coins, or even initial coin distribution disparities, may distort market cap figures to an extent.
  3. Overemphasis on Ranking: Focusing purely on market cap rankings may cause investors to overlook certain qualitative factors, such as the use case, team experience, and technology behind a project. It is essential to undertake comprehensive research beyond market cap figures for well-rounded investment decision-making.

While market cap serves as a valuable metric in assessing cryptocurrencies’ overall standing, it is crucial to consider additional factors prior to making any investments or financial decisions. By blending quantitative data with qualitative information, prospective investors can develop a more profound understanding of a digital-asset’s potential and make more informed choices in their crypto investment endeavors.


Please enter your comment!
Please enter your name here


How to buy Ethereum with Skrill ?

In the ever-evolving world of cryptocurrencies, Ethereum has established itself as a major player. For those looking to...

What is Crypto Trading Bot and how does it work?

Crypto trading bots are software programs designed to automate the execution of cryptocurrency trades on behalf of traders....

How to buy Bitcoin on eToro ?

Bitcoin has become one of the most widely traded cryptocurrencies. If you're a newcomer to cryptocurrency investing or...

How to Earn Free Bitcoin with StormGain Cloud Mining ?

Discover the world of StormGain, a unique platform that offers cloud mining, trading, and secure storage for digital...