What is Market Cap? Understanding the Concept of Market Value
Most beginners in cryptocurrency investment only check the price of a digital currency. Many of them go for cheaper cryptocurrencies, sometimes priced at a millionth or even a billionth of a dollar, expecting the price to reach one dollar so they can become rich. These individuals are often unfamiliar with one of the most important cryptocurrency terms: **market capitalization**, or **market cap**, which is a key reason they frequently make mistakes and incur losses. This metric is one of the most crucial criteria that all traders and investors in this market must be familiar with to properly evaluate projects. In this article, you will learn what market capitalization is, why you should analyze it, and how it is used in cryptocurrency investment.
The total value of a company’s shares in the stock market or a crypto project’s market value is commonly referred to as **Market Cap**, which is an abbreviation of **Market Capitalization**. Unlike a cryptocurrency’s price, this metric effectively determines a crypto’s size and relative value. Professional investors frequently use market cap to evaluate a cryptocurrency’s investment value and compare it to others in the market. Websites like CoinMarketCap also use this metric to rank digital currencies.
Market cap is calculated by multiplying the number of a project’s coins or tokens by their price. For example, at the time of writing, the number of Bitcoin in circulation is 19,454,031 coins, each trading at $29,365. By multiplying these two numbers, you get approximately $571.2 billion, which is Bitcoin’s market cap. You can now easily compare its size and value with a cryptocurrency like Ethereum, which has a market cap of around $222 billion. You can also use this metric to compare the size of different markets. For instance, at the time of writing, the market caps of cryptocurrencies and gold are approximately $1.17 trillion and $12.8 trillion, respectively. Comparing these two figures clearly shows how much smaller the cryptocurrency market is than the gold market.
A cryptocurrency’s market cap primarily indicates its standing in the market. A higher ranking suggests greater popularity and acceptance among investors. Furthermore, the investment risk of cryptocurrencies can, to some extent, be determined by their market cap. Generally, investing in cryptos with a higher market cap carries less risk, as they require significant liquidity to manipulate their prices and tend to have slower movements. For this reason, these digital currencies are more suitable for large-scale investments. As a crypto’s market cap decreases, the risk of price manipulation and the range of price fluctuations increase.
On the other hand, a cryptocurrency’s price alone is not a suitable investment criterion, and comparing prices provides no useful information. Many beginners, without considering a crypto’s market value, invest based on the misconception that it’s cheap and will reach high prices. Additionally, many believe that a higher crypto price means greater value. In most cases, both groups either leave the market at a loss or fail to achieve their desired profit. However, it’s important to note that market cap is not the sole investment metric; it should be used alongside other indicators like daily trading volume and fully diluted market capitalization.
What is the daily trading volume index?
The daily trading volume index, often displayed as Volume (24h), is a supplementary metric for investing in cryptocurrencies. This number is obtained by multiplying the number of cryptocurrencies traded over a 24-hour period by their price. An increase in daily trading volume usually indicates that the cryptocurrency’s price has reached a critical point and a trend reversal is possible. Traders often use the daily trading volume on a cryptocurrency exchange to confirm their entry into trades.
On CoinMarketCap, there is also a metric called Volume/Market Cap (24h), which shows the ratio of the 24-hour trading volume to the market cap as a percentage. This ratio is an important indicator of liquidity. The higher this metric, the more liquid the cryptocurrency is. Furthermore, a higher value for this metric indicates a more stable market for the crypto, and you will encounter less price slippage when buying and selling it. Price slippage, or slippage, refers to a trade being completed at a higher or lower price than expected.
What is fully diluted market capitalization?
Fully Diluted Marketcap is a concept you should consider when analyzing cryptocurrencies, in addition to market cap and daily trading volume. In many cryptocurrencies, not all of the project’s coins or tokens are in circulation; they are gradually mined or released over time. The total of this amount is called Maximum Supply. The fully diluted market cap metric is obtained by multiplying the price by the maximum supply. For example, Bitcoin’s maximum supply is 21 million coins. Multiplying that by the current price of $29,365 gives you a fully diluted market cap of $616.665 billion.
In practice, the fully diluted market cap shows you a project’s potential future value. For this reason, if you intend to invest long-term, you should definitely consider this metric. Additionally, a significant difference between this metric and a cryptocurrency’s market cap indicates that many tokens will likely enter the circulation in the future. This high supply often leads to selling pressure and, consequently, a price decrease. The fully diluted market cap is more useful in bear markets, as investors in these periods often look for more fundamental projects and usually do not hold projects with a high supply.
What are the factors that influence market cap?
To understand the factors that influence Market Cap, you just need to look at the other side of its calculation formula. You’ll get to know these two factors better in this section.
1. Number of Coins in Circulation
One of the values on the other side of the market cap formula is the number of coins or tokens in circulation. It’s clear that as this number increases, the market cap will increase proportionally. This amount depends on a concept called tokenomics, which outlines how a project’s tokens are created and distributed. Additionally, some projects reduce the number of circulating coins through processes like token burning, which in turn decreases the market cap.
2. Price Fluctuations
Price change is the second factor influencing market value. Supply and demand are the most significant drivers of a cryptocurrency’s price. Demand increases for various reasons, such as rising popularity or project advancements, which ultimately boosts both the price and the market value. On the other hand, project-related news, macroeconomic data changes like interest rate adjustments, and the buying and selling activity of market whales are also key factors that influence cryptocurrency prices.
Limitations and Weaknesses of Market Cap
Despite the fact that market cap effectively indicates a cryptocurrency’s relative value compared to other cryptos in the market, this amount is not necessarily a true reflection of the project’s actual value. For example, a project might not have made any progress, but its price could be doubled through various tricks like speculation. As a result, the project’s market value would also double without any added value. Assessing a project’s true value is a very complex task that requires a high level of skill in fundamental cryptocurrency analysis.
Furthermore, the market cap formula does not account for lost coins. Lost coins are those that have been removed from circulation for any reason. For example, cryptos in lost wallets are effectively out of circulation but are still included in the market cap calculation. Therefore, a more accurate calculation of market value would also require the number of lost coins, which is practically impossible to determine.
Introduction to the CoinMarketCap Website
CoinMarketCap is one of the largest reference databases for cryptocurrencies, and it has been operational since 2013. The website provides analysts and traders with a wealth of useful information, including the price, trading volume, number of circulating coins, and market cap of cryptocurrencies. Each cryptocurrency has its own dedicated page on the site, which displays additional information such as related news, a list of exchanges where it’s available, and analytical data.
At the top of the main page, you’ll find an overview of the entire market, including the total number of cryptocurrencies, exchanges, overall market cap, 24-hour trading volume, Bitcoin dominance rate, and the Fear & Greed Index. The rest of the page lists all cryptocurrencies, ranked by their market cap. By clicking on any cryptocurrency, you can access its dedicated page to view its specific information. Additionally, you can create a watchlist and add any cryptocurrency you want to monitor by clicking the star icon next to it.
Types of Market Cap by Size
Cryptocurrency market cap can be categorized into different sizes, each with its own advantages and disadvantages. Let’s explore these categories.
1. Mega-Cap
Cryptocurrencies with a market cap over $200 billion are considered mega-cap. These digital currencies carry the lowest investment risk compared to others, but their growth is also slower. Currently, only Bitcoin (BTC) and Ethereum (ETH) fall into this category. To put their size into perspective, companies like Apple, Amazon, and Meta are also considered mega-cap.
2. Large-Cap
Large-cap cryptocurrencies have a market cap between $10 billion and $200 billion. These digital assets carry more risk than mega-caps but have greater potential for profit. At the time of this writing, only BNB, Ripple (XRP), Dogecoin (DOGE), and Cardano (ADA), along with the stablecoins Tether (USDT) and USDC, are in this category.
3. Medium-Cap
Cryptocurrencies with a market cap between $2 billion and $10 billion are in the medium-cap category. These cryptos are typically more volatile than large-caps. Solana (SOL), Tron (TRX), Litecoin (LTC), and Shiba Inu (SHIB) are currently medium-cap. The smallest member of this group is Ethereum Classic (ETC), with a market cap of $2.51 billion.
4. Small-Cap
Small-cap cryptocurrencies have a market cap between $300 million and $2 billion. These digital assets have high profit potential but also carry greater investment risk. The largest members of this group are currently Hedera (HBAR), Filecoin (FIL), and Internet Computer (ICP). The cryptocurrencies for the decentralized exchanges PancakeSwap (CAKE) and 1inch (1INCH) are among the smallest in this category.
5. Micro-Cap
A market cap between $50 million and $300 million is considered micro-cap. The prices of these cryptocurrencies are highly susceptible to manipulation and, as a result, are very volatile and risky. However, their high profit potential shouldn’t be overlooked. Cryptocurrencies like Loopring (LRC), Enjin Coin (ENJ), Ethereum Name Service (ENS), and GMT are currently in the micro-cap category.
6. Nano-Cap
Finally, the title of riskiest cryptocurrencies belongs to the nano-cap category, which includes digital currencies with a market cap of less than $50 million. Investing in these requires extensive research. Interestingly, in the stock market, these are known as penny stocks. Currently, the largest member of this group is Locus Chain.
A look at the most important market cap indicators in TradingView
The total market cap of an entire market is called Total Market Cap. For example, in the first part, we said the total value of the cryptocurrency market is currently $1.17 trillion. Many analysts use market cap indicators to increase the accuracy of their analysis when examining the price of Bitcoin or other cryptocurrencies. Here are the most important market cap indicators on the TradingView platform.
1. TOTAL Index
The TOTAL index is the most important market cap indicator for the cryptocurrency market, calculated by summing the market caps of the top 125 cryptocurrencies. This index provides an overall view of the crypto market and is highly useful for predicting its direction.
2. TOTAL2 Index
Bitcoin’s market cap is very high relative to the total market and significantly influences the TOTAL index. For this reason, the TOTAL2 index was created, which excludes Bitcoin’s market cap. Analysts use this index to analyze and predict the overall direction of the altcoin market.
3. TOTAL3 Index
Ethereum’s market cap is relatively large compared to other altcoins, so smaller altcoins do not have a significant impact on the TOTAL2 index. Therefore, the TOTAL3 index excludes both Bitcoin and Ethereum’s market caps to make the movements of these cryptocurrencies more apparent. You can use this index to analyze smaller altcoins.
4. Bitcoin Dominance (BTC.D) Index
The BTC.D index, also known as Bitcoin Dominance, is obtained by dividing Bitcoin’s market cap by the total market cap. A rising index means that market investors prefer Bitcoin over other cryptocurrencies. Conversely, a falling index means investors are moving toward altcoins. If this decline is sharp and continuous, it is called an Alt Season.
Application of Market Cap in Balancing an Investment Portfolio
Most investors are familiar with the famous saying, “Don’t put all your eggs in one basket!” While diversifying across different cryptocurrencies may help reduce portfolio risk, professional investors typically also diversify by market capitalization. To reduce risk, they usually allocate a large portion of their portfolio to Bitcoin, which has a high market cap. Of course, Bitcoin maximalists, who are very devoted to this cryptocurrency, often fill their entire portfolio with Bitcoin.
More risk-tolerant investors allocate a portion of their portfolio to Ethereum and high, medium, and small market cap altcoins to benefit from the profits of smaller digital currencies. The percentage of these cryptocurrencies is not a fixed amount and depends on the investor’s risk tolerance and personality. In general, if portfolio security is more important to you, we recommend increasing the weight of high-market-cap cryptocurrencies. If earning a profit is your priority, you can increase the weight of cryptocurrencies with a smaller market cap. Don’t forget that in this case, you must accept the high risk of this investment portfolio.
Summary
For investing in cryptocurrencies, it is best to first research and compare several suitable cryptos. To compare cryptocurrencies by size and scale, you need a single metric. Since price alone cannot provide this information to investors, the market cap metric was created. This metric, obtained by multiplying the price by the number of coins or tokens in circulation, shows you a project’s relative value and size.
In this article, you learned what market cap is and how it is used in investing. Furthermore, you became familiar with concepts such as fully diluted market cap, daily trading volume, liquidity, and their relationship with market cap. You saw that cryptocurrencies are divided into different categories based on market cap, each with its own risk and profit potential. In conclusion, if you intend to invest in cryptocurrencies, try to consider this metric alongside your other criteria when building your investment portfolio to minimize risk.
Source: Coinmarketcap.com
