How Does Market Cap Affect Crypto Prices?

by
How Does Market Cap Affect Crypto Prices?

Market capitalization is used in the global financial markets as a metric to evaluate the size of publicly traded companies. In the global crypto markets, market capitalization is also used to determine the total value of a cryptocurrency. Read on to learn more about market capitalization, why it is an important financial metric, and how market cap affects cryptocurrency prices.

What Does Market Cap Mean in Crypto? 

Market cap, short for market capitalization, shows a cryptocurrency’s total market value, making it an important metric for crypto investors as it measures the size and dollar worth of a cryptocurrency project.

In traditional finance, market capitalization is the monetary value of the outstanding shares of a company. In crypto, it’s related to the circulating supply and the current market price of a cryptocurrency.

Market capitalization is the typical way to rank cryptocurrencies and assets, and it also signifies the popularity and dominance of any asset in the market. It determines the way investors and traders approach certain cryptocurrencies and assets.

Crypto is money – let`s use it!
You can use CryptoWallet to buy, sell, and trade crypto.
Sign up today
Phone Phone Sign up today

How is Market Capitalization Calculated?

A cryptocurrency market capitalization is computed by multiplying the circulating supply by the current price.

Market Cap = Price x Circulating Supply.

For example, at the time of writing, the circulating supply of Bitcoin is 19,163,275 BTC, and the current bitcoin price is $19,427.78.

Using our formula, bitcoin’s market cap is $19,427.78 x 19,163,275 = $372,299,890,779.5.

Bitcoin’s market cap at this time is about $372 billion.

Why Does Market Capitalization Matter in Crypto?

Since a cryptocurrency’s market cap is super easy to calculate, why does it even matter? One of the main reasons investors value market cap is because it helps to value a project relative to another. A crypto project with a large market cap is often considered more established and more successful than projects with smaller market caps.

Market cap indicates the size of a cryptocurrency, and is often used by traders and investors as a baseline for analysis before other financial metrics are viewed.

The price of a cryptocurrency doesn’t tell the full story. Because a specific cryptocurrency is priced at $1,000 doesn’t necessarily mean it’s more valuable than another priced at $500. 

The market cap provides a better way to compare the value of different cryptocurrencies and also shows the growth and dominance of the cryptocurrency. 

How Does Market Cap Affect a Cryptocurrency’s Price? 

Once a cryptocurrency starts trading in the secondary market, supply and demand determine its price. If there is a high demand, the crypto price will increase, and when there’s a huge supply without a corresponding rise in demand, the crypto price decreases. 

Market cap can influence the psychology of buyers and sellers in a market, which affects the crypto price. Since a huge market capitalization shows dominance and reduces the possibility of market manipulation, it means traders and investors are more likely to buy more of the crypto with the biggest capitalization. 

Why is Market Cap Not a Good Measure of Value in Crypto? 

Market cap is a basic tool for an investor looking to invest in crypto and evaluate potential opportunities. It is a quick and simple method for assessing a crupto venture’s value and size.

However, market cap isn’t always the best measure of value for a cryptocurrency. Market cap can be somewhat meaningless because it can be manipulated to build a false sense of value. It’s often dangerous and misleading to evaluate cryptocurrency projects based on just the market cap. For example, if you launch a new token with a supply of 1 billion tokens, start trading it on a decentralized exchange, and trade one token for one dollar with a counterparty you know (or yourself), you now have a cryptocurrency with a theoretical $1 billion dollar market cap. Therefore, it’s best not to judge a crypto project purely based on its market cap.

Moreover, the market cap is mostly driven by price, not exactly the value the project generates. It does not reflect the value of the crypto asset, but that people are willing to pay more, which is usually driven by market sentiments. This is often not linked to the real value the crypto project provides.

For example, if a lot of people demand more for a cryptocurrency in a short period of time with a reduced supply, the price will skyrocket, and the market cap will also increase. But the rise in demand could just be a short-term pump, which will later be deflated, hurting unsuspecting investors.

FAQs

What Is Market Cap in Cryptocurrency?

Market cap is the total dollar value of a cryptocurrency in the market. It’s calculated by multiplying coins in circulation by the current market price of the coin.

What Is a Good Market Cap of Cryptocurrency?

Cryptocurrencies with a market cap above $1 billion are generally considered more stable relative to ones with a lower market cap. They are typically regarded as having a huge upside but also potentially more risk. 

What Is Market Cap and Circulating Supply?

Market cap is the total dollar value of a cryptocurrency available in the market, while circulating supply is the coins released and available to buy, sell and hold in the market.

How Much Is the Crypto Market Cap?

The total crypto market cap is $940,200,971,300.416, with bitcoin (BTC) having almost 40% dominance.

Is Market Cap Important in Crypto?

Market cap is the first metric traders and investors generally look at when evaluating a cryptocurrency. It’s the simplest and quickest way to compare the relative size of projects.