Market cap (or market capitalization) is a metric that measures the value of a cryptocurrency. We calculate the market cap by multiplying a coin’s current market price with the total number of circulating coins.
Note that it is important to look at a project’s circulating supply and fully diluted value (or maximum supply) as some may have very inflationary tokens, which could eat away at the value of holdings.
Calculating market capitalization
Market capitalization= Current Price (per unit) X Total Supply (or number of circulating coins)
Market capitalization is often used by both fundamental and technical analysts to offer a clear indicator of an asset’s acquired value. Many investors use a coin’s market cap to estimate its potential growth and calculate a risk-reward ratio.
It is necessary to note that while the market cap may provide insights about a project’s performance and size, it does not equal money inflow. This is a common mistake made by investors as the calculation of market capitalization depends on price. However, even a minor variation in price can significantly alter the market cap.
Categorizing market capitalization
We can categorize market capitalization in the following way:
Large-cap: These coins make the safest investments due to their large market capitalization, which means that billions are already invested. Some examples include Bitcoin, Ethereum, EOS, Cardano, and Chainlink.
Mid-cap: We can categorize cryptocurrencies with a market cap of below $1Bn here. These coins are still popular and reliable, but they are riskier than large-cap coins.
Small-cap: These assets have a market cap of below $10M and are the riskiest assets. They have a high failure percentage and are not yet well-established projects. They tend to suffer from strong manipulation. Big market movers (whales) typically control the supply and price of cheaper coins.
Developing an understanding of market cap categorization can assist an investor in creating a diversified portfolio. Balancing risk is an important part of investing and it is important to know how to limit one’s losses in the volatile market.
