What is a crypto market cap, why is it important and what does it do? And most importantly, how can you use this information to your advantage? Let’s find all the answers to these questions.
What is a crypto market cap?
A market cap, or market capitalization, is a simple indicator of a crypto coin’s popularity on the market. It is simply the price of the coin multiplied by all the coins in circulation.
In short Circulating Supply X Price = Market Cap.
What is the circulating supply?
The circulating supply is all assets / coins / stocks that are currently in the market. As long as people are able to trade with them, they are part of the circulating supply.
For example, a cryptocurrency can have a set supply of 1,000 coins, but if all the investors own just 100 of them, then the circulating supply is 100 coins. The rest might have to be mined or released into circulation by the company. Or the coins can be just simply lost due to someone forgetting their password. Just like it seems to be the case with 20% of all Bitcoin.
How does the price work?
The price of the coin, token or stock rises and falls according to the demand. If someone offers to sell their coin for $1 and someone is willing to buy it for that price, then the price is exactly that, $1. If someone decides to sell the same coin for $100 though and someone buys it, then the current price rises to that amount. A simple supply and demand.
There is no set value for any cryptocurrency, only market. This also means, the more coins there are, the lower the price usually is as the circulating supply is massive compared to the demand. And, of course, the other way around also applies.
The price can be also manipulated by things like pump & dump groups or media hype around the coin. The best example of this as of 14th of February 2021 is $DOGE coin. A crypto coin that was created as a joke with theoretically infinite supply, yet it rose to way above what it normally would due to Elon Musk tweeting about it.
An example
Let’s make a simple example as a summary of what we’ve learned. If the coin is worth $1 and there is a 1,000,000 coins on the market (circulating supply), the market cap of this coin is $1,000,000.
Perspective
Recently, a new tool surfaced that shows you what market cap does a coin have to reach to be a certain price and what does that mean. Try comparing a coin like $DOGE and $BTC to see why the claims that Doge is the next Bitcoin are absolutely crazy. Even with 2 trillion market cap, Doge is still at $15.58, while Bitcoin is at $107,400. Anyone that tells you Doge can reach the same price is spreading misinformation and want you to just pump their coin so they can sell for profit. It’s virtually impossible since Doge has an infinite supply.
What does crypto market cap indicator do?
As I mentioned above, the price of a coin rises with the coin’s popularity. If you look at the market cap of two cryptocurrencies, you can see which of these two crypto coins is more popular in simple numbers. Or you can see what coins are undervalued.
If there is a great project behind the coin with stunning potential for growth and the market cap is several times lower than the coins in the similar field, it might be a really good indicator to buy such coin.
Another thing this indicator shows is the coin’s volatility. In other words, how much the price can rise and fall. Usually, the higher the market cap, the more stable the coin is over the long-term. This is why people tend to like Bitcoin as their storage of money. Its market cap by the time of this article is almost 1 trillion dollars.
In comparison, Ethereum, the second most popular coin, has a market cap of around 200 billion dollars.
Low-cap, mid-cap and large-cap comparison and how to use them
As mentioned before, the higher the coin’s market cap, the lesser volatility and thus, theoretically, safer investment. So why would anyone invest in other coins?
Well, this is usually due to their growth potential. The volatility means that the coin can rise by 1000s of % in the future compared to large-cap coins that usually rise by 10s to 100s of %. This is why people usually have most of their capital in large-cap coins like Ethereum or Bitcoin for steady growth. Then, they use high-risk investments into low-cap or mid-cap coins to increase their large-cap crypto supply.
Large-cap coins are usually considered the top 10 coins. Mid-cap would be top 10 to 50 coins and low/cap, everything below that. You can see these rankings on the Coin Market Cap website.
Summary
And that’s it. If you feel like finding out more information about trading, consider checking out the article about the Secrets of Crypto Trading. Otherwise, as always, don’t forget to make your own research. None of this stuff is 100% predictable, so always go in with the money you are willing to lose. Good luck with your crypto journey and have a wonderful day.
