Crypto market capitalisation explained: what it is and why it matters?
Barely a decade after Bitcoin, the first decentralised cryptocurrency, went live, the crypto industry is one of the fastest-developing, with immense growth under its belt.
That same industry gave us over 10,000 cryptocurrencies, according to Statista.
Having this many choices is without a doubt great but also creates a need for some guidance in the investment process, guidance that can be provided by an essential tool called crypto market capitalisation.
Those of you interested in learning more about the topic and why it is essential for your journey as a crypto investor, be sure to keep on reading!
What is crypto market capitalisation?
Crypto market capitalisation refers to the total monetary value of a cryptocurrency. It also represents a valuable tool for measuring a cryptocurrency's relative size, stability, and growth potential. With it, an investor can make more informed decisions.
Generally, the larger the market capitalisation of a cryptocurrency, the more stable and less risky it is considered.
Let's take Bitcoin (BTC) and Gala (GALA) as an example.
BTC is the leading cryptocurrency with a market capitalisation of $723 billion at the time of writing. GALA, another popular cryptocurrency, has a market capitalisation of $955 million. The significantly larger market capitalisation of BTC means that it would require a relatively massive amount of capital inflow or outflow to move its price up or down. GALA's price, on the other hand, would require much less to be moved, making BTC a better investment.
Now, you might be wondering, "can't I just come to the same conclusion using market price?". The answer is no, and here is why.
Often, it can be tempting to measure a cryptocurrency's value based on its market price. But that's not effective.
If we take a look at the price of Bitcoin Cash (BCH), it's obvious that it's worth hundreds of times more than Ripple (XRP). For that reason, an investor may be tempted to think the former is better, but when looking at the market capitalisation of both cryptocurrencies, one can see that XRP is the clear winner. And although cryptocurrency market price is correlated to market capitalisation, using the price alone to determine the true value and potential of a crypto asset can be misleading.
What is a good crypto market capitalisation?
Individual research is crucial when investing, but let's suppose we were to give you a pointer on what cryptocurrencies to pay attention to. In that case, we could safely say cryptocurrencies with relatively low supply but high value, as they represent assets that have more stability and less risk associated with them. So, keep that in mind next time you are browsing the crypto market. It might come in handy!
Calculating crypto market capitalisation
A stock's market capitalisation is calculated by multiplying the stock's price by the number of shares. Similarly to that, the market capitalisation of a cryptocurrency can be calculated by multiplying the current market price by the circulating supply.
Market Capitalisation = Current Price x Circulating Supply.
So, if cryptocurrency X with a unit price of $10 has a circulating supply of 10,000,000 coins or tokens, then its market capitalisation would be $100,000,000.
Looking at this, calculating the market capitalisation of a cryptocurrency seems very easy to do. However, it can get a bit complicated depending on the type of cryptocurrency and the method of coin/token issuance adopted.
Of course, other methods of determining the market capitalisation of a cryptocurrency do exist, and they don't take into account the circulating supply. What they do take into account is the total and the maximum supply, both of which require calculations to be done.
Factoring in other variables like coin reserves, lock-up periods, etc., is part of these calculations, making it obvious why for some cryptocurrencies figuring out the market capitalisation can be quite a challenge.
Luckily, data tracking sites like CoinMarketCap and CoinGecko can provide you with all the necessary information to assess a cryptocurrency and remove the need for any manual work on your side.
Why is market capitalisation important?
Using market capitalisation to value an asset is common practice, especially in traditional finance. And even though crypto heavily pushes to be everything but traditional, if a practice works well, why not use it?
To understand if a project is worth putting money behind, a crypto investor must know the project's market capitalisation and, with that, what market capitalisation category it belongs to.
Once projects are each put in an appropriate category, crypto investors can scour their options and make decisions more easily while taking into consideration their risk tolerance.
Categorisation of crypto projects based on market capitalisation
A large-cap cryptocurrency is one with a market capitalisation of $10 billion and above. These cryptocurrencies fall on the lower end of the investment risk spectrum. Often, you can hear people referring to them as blue-chip cryptocurrencies, which are generally considered to have higher stability and liquidity due to sustainable growth over time.
Large-cap cryptocurrencies appeal to investors with more conservative investment strategies. Therefore, individuals with high net worths and institutional investors like Grayscale, MicroStrategy, and even the quite new Luna Foundation Guards (LFG) tend to invest in large-cap cryptocurrencies like BTC or ETH.
Other cryptocurrencies that currently fall into this category, according to CoinMarketCap, include AVAX , XRP, LUNA, ADA, etc.
Cryptocurrencies that fall into the mid-cap category have a market capitalisation of more than $1 billion but less than $10 billion.
These are riskier than large-cap cryptocurrencies but have a lot more growth potential.
Investors with a relatively high-risk tolerance invest in this category of cryptocurrencies.
Some cryptocurrencies that fall in this category include ATOM, LINK, UNI, AXS, etc.
Small-cap cryptocurrencies are generally hypergrowth cryptocurrencies with a market capitalisation of less than $1 billion.
A low market capitalisation means that these cryptocurrencies can fluctuate dramatically in price in response to even minor capital flows.
They fall on the high end of the risk spectrum, are heavily affected by market sentiment, and are highly susceptible to market volatility. Thus, investments into cryptocurrencies of this category are usually short-term as high-risk investors try to take advantage of market volatility.
Most cryptocurrencies in this category tend to crash and go to zero.
Word of advice: Please note that market capitalisation is not a static number. Instead, a cryptocurrency might have blue-chip status this month and lose it the next due to extreme volatility or a smart contract hack. For that reason, giving the market capitalisation of a cryptocurrency another look from time to time is a good idea.
Is market capitalisation the best way to value a cryptocurrency?
The usefulness of market capitalisation in valuing a cryptocurrency and assessing its growth potential cannot be overstated. However, there is still a lot that goes into the process, and relying solely on market capitalisation might not be enough in most cases.
Getting "the full picture" would require deep knowledge of tokenomics as well as macroeconomic factors and taking a look at a non-liquid market. Why? Well, in some situations, non-liquidity can affect the actual market cap due to locked-up or lost coins/tokens. This, in turn, affects the public opinion of the coin/token as well as its value.
Market capitalisation is a great tool for making smart investments. It is needed by every crypto market investor for making data-based decisions and hedging against emotional sways. In volatile, hype-driven environments like the crypto market, having this approach is the way to go.
We hope you enjoyed reading this educational piece on crypto market capitalisation. We have plenty more in our content pipeline, so be sure to visit our blog again!