Market cap is the short form of market capitalization and is one of the most followed metrics in finance.
In cryptocurrency, a market that’s relatively new and developing, the market cap is a gauge of liquidity and, on a sentimental level, the popularity of a given project.
Broadly, the market capitalization of any company refers to the total value of its outstanding shares. In simpler terms, it’s how much money people would be willing to invest in that company if they could.
Panning over to crypto, the market capitalization of a project tells you how much value it has in the greater scheme of things at any point in time.
What is a Cryptocurrency’s Market Capitalization?
A coin’s market capitalization is the dollar value assigned to its current supply.
The market capitalization of a cryptocurrency indicates its real-time value. This is factoring in the fact that the sphere is volatile. As such, the market cap of any project, including Bitcoin, tends to change over time.
If you want to find the true worth of a given crypto project, you should take its current market capitalization with a grain of salt.
This is because it doesn’t include tokens locked up by the team or investors. Therefore, if these tokens are integrated into the calculation, the market cap can significantly fluctuate.
Calculating the Crypto Market Capitalization
The formula for calculating cryptocurrency market capitalization is pretty simple.
It is calculated by multiplying the spot price of the coin by its circulating supply.
Here’s an illustration to help you understand the market cap better.
Let’s say a project has 10k coins in circulation. Each costs $1 in the secondary market. The total market cap will be 10,000*$1 for $100,000.
If these coins’ value rose to $10, the market cap would be $1,000,000.
The good news is that market cap calculation work has been slashed for users. At any time, interested persons can automatically find the market cap details of almost all popular cryptocurrency projects on tracking websites like CoinMarketCap (CMC) and others.
Still, a trader should know that the circulating supply of a coin—which is used in this calculation—is different from the total supply.
Circulating supply is the number of coins available for trading at any point and is always lower than the total supply.
On the flip side, the “total supply” of a coin indicates the total number of coins to be ever minted by the project.
Why is Cryptocurrency Market Capitalization Important?
A cryptocurrency’s market capitalization is essential when deciding which tokens are worth looking at and investing in.
Since the market cap measures liquidity and investor interest, any token with a high market cap is worth researching more thoroughly since many more investors and traders keep it in their tabs.
On the flip side, tokens with a low market cap may demand more research. However, that doesn’t mean the project is low quality. In some instances, low market cap tokens may exponentially rise in value over time as it builds their community and grows their valuation. They could be worth investing in when their market cap is lower and undervalued spot rates.
The main limitation of market capitalization is that it doesn’t account for the rate at which the tokens are expected to increase in value. The rate at which a token’s price will increase in the future is usually a lot more critical than the current value of a cryptocurrency.