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The Logic Behind Market Capitalization

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4 min read
The Logic Behind Market Capitalization

Is this simple metric enough to understand the value of a cryptocurrency? Perhaps there's more to it than you thought!


For just about anyone that has been exposed to the crypto markets for a little while, a common question they’ll have is, what exactly is market capitalization, and why does it matter. So let’s dive into what this incredibly common metric can tell you about a cryptocurrency and why it’s a valuable tool to understand when jumping head first into trading.

What Is Market Capitalization?

When speaking about a traditional business, you’d typically look at market capitalization as how much the company is worth by calculating the total market value of any outstanding shares. However, when it comes to crypto, it’s a bit different.

To calculate the market capitalization of a cryptocurrency, you can simply multiply the total supply of the crypto by the current market price of each token or coin. As the supply of each cryptocurrency can vary significantly, the market cap is a reasonable way to look at how large a crypto project is in a straightforward way. It’s also a quick and easy approach to getting a general idea of the scale of the market for a particular asset.

How Market Capitalization is Useful

Looking at the current price of a cryptocurrency is very common. The problem with looking at a cryptocurrency in terms of price alone is missing some contextual information essential to understanding the asset. Every token and coin has its own independent economics. You may have a cryptocurrency with only a max supply of one, and you may have another with 100 billion tokens in supply.

The problem with having such a varied supply for all these assets is that it makes price an ineffective measure on its own. While it may be impressive for a cryptocurrency to have a price of over $1000, if there’s only a supply of 1000, this is a lot less impressive than a cryptocurrency with a price of even $100 where there are millions in the supply. If you’ve ever seen a cryptocurrency that is only worth a few cents apiece and thought perhaps it was cheap, it was likely just the simple matter of having a huge supply, and that cryptocurrency making it to even a single dollar in equivalent value may be a challenging feat to achieve as it would require a massive market cap.

Downsides of Using Market Cap as a Metric

When looking at market cap as a sign of a large amount of value surrounding an asset, it’s not always that simple. Using this as a key metric is often valuable, but it doesn’t take into account things like volume, liquidity, and whether or not, in general, the market price is realistic.

For example, if only a tiny percentage of the supply is liquid, this can result in price spikes that don’t genuinely reflect the value of the entire supply. At the same time, if a coin or token is challenging to trade, perhaps it has minimal exchange listings or is only tradable on specific region-locked exchanges, the price may reflect this challenge with an unrealistic price premium. But, of course, at the end of the day, these issues are more about the actual price of the crypto. Still, suppose you’re only looking at market cap as a way to value the market for a digital asset. In that case, it’s worth understanding that it’s not always a clear-cut situation, and a large market cap does not always mean a large established project.

What Is the Total Market Cap?

Sometimes when looking at crypto market data, you’ll stumble across a metal called a total market cap; this is a broader metric that is often used to show how well the overall crypto market is doing.

If you’re looking for a picture of how the crypto market is doing, this can be a helpful way to look at the current sentiment on crypto in general. However, how this specific metric is calculated is not much different from just the market cap of a single crypto; it’s just a combination of all (or at least most) of the active cryptos.

Is It Better to Have a Large Market Capitalization?

In a perfect scenario where all else is equal, a bigger market cap can be considered better in the general sense. Therefore, larger market cap cryptocurrencies tend to get more attention and more development efforts towards them directly or indirectly via projects that use or implement the cryptocurrency in some way.

Some investors look to market cap as a way to gauge the growth of a cryptocurrency compared to the rest of the market. For example, a crypto with a market cap that is on the lower end to moderate may have good potential for growth if the project is high quality in other ways, while higher market cap projects may be safer bets they may have less potential for massive growth.

In short, a bigger market cap does not magically mean it’s an excellent investment; it’s just one of many metrics you should consider before investing in a cryptocurrency, or anything for that matter.

What Causes Changes in Market Cap?

As market capitalization is a reasonably simplistic metric, there are only two things that can affect a cryptocurrency's market cap: a change in its price or a difference in the supply. With how experimental the crypto ecosystem can be, it’s not uncommon for a project to manipulate its supply through a token swap, dilution of supply, or something else. Suppose anything dramatic ever happens to the supply of a token or the price changes (which it constantly does in varying degrees of intensity). In that case, it’s just a matter of correcting the calculation to achieve an accurate market cap number.

If you want to monitor cryptocurrency market capitalization, there are a range of sites to do that. Some of the best places for tracking popular market statistics include CoinGecko, Nomics, and CoinMarketCap, which all make it really easy to check the market cap, price, supply, and other stats of just about any cryptocurrency.

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