Even if you are aware of what Bitcoin is, you might still be in the dark about such a notion as “cryptocurrency capitalization”. What does it imply? Let’s try to figure out what is the cryptocurrency market cap, and which factors it is defined by.
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How Is Market Cap Calculated?
Let’s start with the definition of market cap.
To put it simply, cryptocurrency market capitalization is the value of all crypto tokens in circulation. To calculate the market capitalization, you should multiply the amount of all circulating tokens by the price of 1 unit.
Market cap is a lot less complicated than it sounds. Let’s explain market capitalization rate with an example. Imagine that there is an organization that emitted 1,000,000 tokens – all are in circulation. One token costs $5. In order to assess the value potential of the entire company, we need to make the following calculation: multiply the total number of its shares (tokens) by the price of one asset. 1,000,000 x $5 = $5 mln.
A large market cap in cryptocurrency can indicate both the high cost of one coin, or a large number of coins in circulation. The growing cryptocurrency market capitalization is an important aspect for potential investors. It proves that this crypto is developing, and digital money is becoming an increasingly popular means of payment.
Yet we should note that it is impossible to estimate the value of virtual coins because there is no way by which their actual value can be fixed – their price is not bound to gold or any other physical asset. Since they are not tied to oil, gold or traditional currencies, there is also no way to identify the real ratio of cryptos that are still functioning and those that have been lost. After all, cryptocurrency can disappear due to collapsed servers and network issues.
However, the market capitalization of cryptocurrencies is not the only parameter that attention should be paid to. The trading volume for a certain period of time is also important. Growing interest in digital money proves that crypto investments really pay off, and with each subsequent day, the cost of a crypto asset will get higher and higher.
What does market cap depend on?
When it comes to cryptocurrencies, market capitalization is entirely dependent on changes in the exchange rate and the activity of market players. The total amount of crypto remains pretty much unchanged.
Given the fact that the capitalization of cryptocurrencies depends on exchange rate, we can say that the level of demand also affects it. The more actively people are interested in a particular digital currency, the higher are its value and capitalization. In particular, the cost of crypto assets is defined by such aspects as:
- activity of large players on exchanges;
- innovative technologies in the field of crypto;
- opinions of authoritative people, conclusions of analysts, experts, financial influencers, etc;
- regulations that govern the status of Bitcoin and other cryptos;
- news regarding virtual coins.
Crypto Market Cap vs Stock Market Cap
The term market capitalization initially originates from the securities exchange. To comprehend the difference between market cap in stocks and crypto, you need to comprehend how stocks work.
Owning stock in an organization renders you a portion of its proprietorship. Possession comprehensively implies two things:
- Having the right to a part of the company’s future income distributed as dividends.
- Receive a proportionate amount of proceeds in case the company is sold
The all-out estimation of the considerable number of offers is the market cap of the organization. The organization’s market cap is a gauge of its present capacity to deliver income and its potential for development. A huge level of an organization’s stock is held by the originators and other large investors.
When it comes to cryptocurrency, a huge part of the tokens is held by people outside of the project and by whales who simply gobble up the tokens and keep them passively in their wallets.
What’s the difference then?
A large portion of these stocks deliver profits. Along these lines, the stocks that the proprietors will have will procure them profits, which will weaken the stocks claimed by different investors. But it’s not the case with cryptocurrencies. At the point when a whale accumulates tokens in their wallets, it just stays there. The rest of us would not forget about such sums on our wallets, would we?
Another major difference between cryptocurrencies and traditional securities, such as stocks, is the inability to accurately determine the real capitalization, since it is impossible to determine how much cryptocurrency is actually available to investors, and which amount has been left forever on users’ accounts as a result of password loss or an erroneous transfer to incorrect addresses (which is irreversible).
How Can Market Cap Influence Investment Behavior?
Do not confuse the market cap of Bitcoin with its cost – these are different concepts, even though they are interconnected: a drop in capitalization leads to a decrease in cryptocurrency price, and, correspondingly, crypto price growth leads to an increase in capitalization. Why?
The price of cryptocurrencies is mostly based on faith: seeing that capitalization growing, investors understand that demand is increasing and exceeding supply. Someone invests considerable money, accordingly, the price of crypto will increase, so it’s better to buy it as early as possible, which will further increase the demand.
Crowds of minor speculators and trading robots accelerate this process by creating the snowball effect until some important event occurs and changes the situation, or until large players begin to fix their profits. This is where the trend gets broken.
Why is market capitalization a secondary aspect in cryptocurrency trading?
The market capitalization indicator does not reflect the real value of either an individual cryptocurrency or the market as a whole. Here’s why:
- The numbers coincide with reality only if all issued coins have been sold, and this is almost impossible;
- It is often impossible to audit the companies behind the issue of tokens, and cryptocurrency is supported only by investors’ money;
- Issuers often leave funds for themselves: such coins are not backed up by anything, and their amount might be unknown.
In this regard, stablecoins remain the most transparent since their issuers (for example, Circle, the developer of the USDC cryptocurrency) regularly performs official audits. According to the reports, 4 bln crypto-dollars behind this digital money are stored on real bank accounts. For other currencies (including Bitcoin), market capitalization is no more than a nominal number – the multiplication of the amount of currency by the stated price.
If we decide to perform the calculation of the total cryptocurrency market capitalization, the task becomes even more confusing. The problem is that the figures get distorted not only by the aforementioned factors, but also Bitcoin: it becomes the intermediary between the investor and the currency.
Investments in the market are made in dollars and are calculated in dollars, but not all cryptocurrencies can be bought with USD. Many altcoins are still only traded in conjunction with Bitcoin. To acquire them, an investor first buys Bitcoin (which increases the market capitalization of BTC), and then invests Bitcoin in the altcoin, thus increasing the capitalization of the latter.
Bottom Line
Cryptocurrency market capitalization is a basic parameter that reflects the total value of all virtual money in circulation. Roughly speaking, this is a kind of indicator of the market power of a cryptocurrency.
If you are thinking about investing in cryptocurrency, be sure to consider market cap. Minor currency price fluctuations cannot affect the company with a high level of capitalization. At the same time, assets that have a low market capitalization may exhibit rather serious fluctuations over short periods of time.
