What Is the Market Cap and How Does It Work in Crypto?

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Market capitalization is one of many ways to measure the size of the cryptocurrency market. You can calculate it by multiplying the total supply of coins by the current price per coin or token. This gives you an estimation of the cryptocurrency’s market value and helps to compare it against other tokens.

The ‘market cap’ provides a valuable way to quickly evaluate one cryptocurrency’s relative size against another. For example, if you wanted to compare Bitcoin and Ethereum, you could look at their respective market caps.

Market cap is essential for investors because it helps them make more informed decisions when investing in crypto. A higher market cap indicates a more extensive and successful cryptocurrency. In contrast, smaller market caps may suggest the coin is less widely accepted or used.

Components of Market Cap

Let’s take one step back and look at what makes up a cryptocurrency’s market cap. The two most important components are the number of coins or tokens in circulation and their current price on exchanges.

The total supply is easy to find. You can simply go to the coin’s website and find out how many coins have been mined or released. However, the current price is more difficult to calculate. It will depend on the exchanges you use and the trading volume at that particular moment.

A good strategy is to look at the average price on several exchanges. This can give you a better idea of the cryptocurrency’s market value.

Alternatively, websites such as CoinGecko and CoinMarketCap provide multiple details about each cryptocurrency. As you can easily imagine, the market cap is one of the most accessible numbers on these websites.

Factors that Affect a Cryptocurrency’s Market Cap

Naturally, many factors can affect a cryptocurrency’s market cap. The most important one is the level of adoption by users and businesses. If more people use a crypto asset, its market cap will increase as demand and price increase.

Other factors include news events – both positive and negative – as well as exchange rates. These can impact a cryptocurrency’s market cap. Therefore, tracking them to make more informed investment decisions is essential.

Let’s consider, for instance, the market capitalization of the whole crypto market. In November 2021, the market cap peaked above $3 trillion, falling below $1 trillion in 2022. This was because of several factors, including news events, that caused investors to become more bearish on the crypto market.

Pros and Cons of Using Market Cap

The number of times you hear market cap mentioned in the news indicates its importance in the crypto world. It is a handy metric for assessing a cryptocurrency’s size and potential, but it also has some drawbacks.

The most significant advantage of using the market cap to measure success is that it is easy to calculate and understand. Just multiply the total supply of coins or tokens by the current price per coin or token. 

This gives you a quick way to compare one crypto asset against another, which can be helpful before investing.

The downside is that the market cap does not consider other factors such as adoption rate, network activity, or fundamentals. All these features can significantly impact a cryptocurrency’s performance in the long run. 

It is important to remember that market cap can only tell you so much. Consequently, only some people should take market capitalization as much as it is: a mere number.

The Difference Between the Circulating Supply and the Total Supply

Let’s complicate things a bit more. First, you must understand the difference between cryptocurrency’s circulation and total supply when looking at the market cap.

The circulating supply refers to the number of coins or tokens in circulation. In contrast, the total supply is the maximum number of coins or tokens that will ever be released. This can significantly impact the market cap, especially if the total supply is much lower than the circulating supply.

For example, Bitcoin has a maximum supply of 21 million coins, while Ethereum does not have any cap. The difference in total supply can drastically affect their respective market caps. Therefore, it is essential to understand the difference between the two when assessing a cryptocurrency’s value.

Simply put, comparing the raw prices of two cryptocurrencies will likely be meaningless. So instead, look at the circulating supply, total supply, and other factors to see each crypto asset’s value.

Understanding the Concept of Fully Diluted Market Cap

It is also essential to understand the concept of a ‘fully diluted market cap.’ This metric considers the circulating supply and any potential future releases of coins that may occur in the future.

Imagine a cryptocurrency with a limited supply and some locked-in coins that could eventually enter the market. The fully diluted market cap considers these potential future coins or tokens in this case.

This is a valuable metric for understanding a cryptocurrency’s value and can provide further insights when comparing assets. However, remember that this metric does not consider other factors, such as adoption rate or network activity.

Also, this value is purely theoretical. There is no guarantee that once the circulating supply reaches its peak, the token price will not decrease. That’s why keeping the market cap in perspective and considering other factors before investing is essential.

How Can You Use Market Cap as a Measure of Success?

Market cap is a valuable metric for assessing the size and potential of any cryptocurrency. However, remember that it does not consider other important factors such as tokenomics, token utility, and vesting timeline.

Anyone can use it alongside these metrics to assess a crypto asset’s actual value and potential performance. For example, would you prefer an overvalued token with no utility or a little-known coin with multiple use cases? 

A cryptocurrency is as good as its community. Therefore, any reasonable investor must consider the market cap and all other metrics when making investment decisions.

Is High Market Cap Always Good?

If you are familiar with speculative bubbles, you may wonder if a high market cap is always good. On the contrary, higher market caps usually indicate more interest and potential success. However, the market may overestimate a coin’s value, making its price growth unsustainable.

When the market eventually corrects, this can cause prices to crash and investors to lose their money. Therefore, looking at other factors when considering investing in a cryptocurrency with a high market cap is essential. 

This includes assessing the technology behind the currency, its adoption rate, and the potential future demand for it. Additionally, always look at the project’s tokenomics, utility, maximum/circulating supply, and more.

What you need before investing is to assess the so-called “bigger picture.” Do not rely on a large impressive market cap to risk your money.

Final Thoughts – Market Cap and Crypto assets

The market cap is an important metric when evaluating any cryptocurrency. It can give investors a good idea of the size of the asset and how it compares to other tokens.

However, it should not be the only measure of success in this niche. Investors must look at all available metrics to understand a cryptocurrency’s value and potential performance accurately.

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You can get a more informed assessment of any crypto asset before investing. Above all, your due diligence should include the importance of market cap, but it should integrate it with other details. 

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