Market capitalization as a term has also entered conversations about crypto investing over time. Its definition and applications in crypto aren’t quite the same as in the traditional stock market. Cryptocurrency market cap is broadly defined as a metric that measures a particular cryptocurrency’s total value in the current market.
The market cap of a cryptocurrency is determined by dividing the total coins ever mined by the price of a single coin at any particular moment. Market capitalization can be used as a valid measure of how stable an asset is likely to be.
This feature provides a brief introduction to the cryptocurrency market cap, why it’s important to understand it, and what it means for investors.
What Is the Cryptocurrency Market Cap and How Does It Work?
Since the inception of Bitcoin, the first cryptocurrency, more and more cryptocurrency projects have steadily entered the scene, each promising different perks or uses to investors. Some altcoins boast unparalleled transaction speeds, while others claim to offer the lowest fees.
Other coins, like the privacy-focused altcoin Monero (XMR), offer airtight security and total privacy. XMR transactions made through a specially encrypted Monero wallet are allegedly completely anonymous and untraceable, making Monero an ideal coin for users with outstanding cybersecurity concerns.
At present, there are thousands of active cryptocurrency projects available for traders to invest in. Naturally, every single one of these coins will be valued differently in the market, and this value is what market capitalization in crypto aims to measure.
A particular coin’s market cap is meant to give investors a sense of how big the project currently is and how well it’s performing.
A cryptocurrency’s market cap is calculated by multiplying the coin’s current market price by the total circulating supply. For example, if a certain coin is being traded at $5 per unit and around 10,000,000 coins are in circulation, its market cap would be $50,000,000.
Many crypto experts regard the market cap as the most important factor for determining a cryptocurrency’s viability as an asset. There are now a number of websites and online indexes that calculate and track market capitalization for different cryptocurrencies, as well as other important financial metrics. These sites enable crypto investors to monitor the dominance and popularity of their chosen coins.
Also Read: 10 Tips to Survive Crypto Bear Market
Why does the Market Cap Matter?
A crypto project’s market cap can provide valuable insight on that project’s relevancy, particularly for investors that aim to assess a specific coin’s popularity in the long term.
Most crypto experts will agree, for instance, that coins with large caps of over $10 billion are relatively safe investments. Investing primarily in such coins is usually considered a conservative strategy, as these cryptocurrencies are likely to be less unpredictable investments than other coins.
It’s worth noting, however, that even the most supposedly stable cryptos out there will still be more volatile in terms of their value than traditional investing products like stocks or bonds.
Mid-cap cryptocurrencies are those with market caps between $1 billion and $10 billion. In contrast to large-cap cryptos, these cryptos are usually much more volatile, but they may have more potential to grow. Meanwhile, small-cap cryptocurrencies are those with market caps under $1 billion. They’re often subject to extreme price volatility, often rising or falling in value significantly in a matter of just a few hours.
Small-cap cryptos are thus, considered the highest-risk investments it’s possible to make in crypto, even if their growth potential is projected to be good in the short term.
How Can the Market Cap Affect Your Investing Strategy?
One viable way investors can apply their knowledge of the market cap is by pursuing a weighted market cap investing strategy. Following this strategy, the amounts that traders invest in their chosen cryptocurrencies are proportional to those coins’ current market cap.
To illustrate, this means that an investor aiming to put down $100 in total crypto investments should allocate the greatest portion of this amount to the coin with the largest market cap and smaller portions to other less popular cryptos.
It’s important for novice crypto investors to bear in mind, however, that the market is prone to dramatic price fluctuations even for large-cap coins. Hence, market capitalization is constantly changing even for the largest and most popular coins out there. Because cryptocurrency is a relatively new asset in comparison to traditional assets like stocks, there are currently few ways to predict how a particular coin’s value or growth trajectory is likely to change over time.
Cryptocurrency’s unpredictability is the primary reason financial experts encourage new traders to invest cautiously even in large crypto projects. It’s always a good idea for the novice investors to do thorough research before committing to any investments and only put down as much money as they can afford to lose.