What exactly is market cap or capitalisation?

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Explanation

Market capitalisation (or market cap) is the cumulative value of all coins mined by a cryptocurrency such as Bitcoin. It is determined by calculating the actual selling price of a single coin by the number of coins in circulation.

The average dollar value of all shares of a company’s stock — or, in the case of Bitcoin or another cryptocurrency, all coins mined — is known as market capitalisation (or market cap). In the cryptocurrency world, market cap is determined by multiplying the total amount of coins mined by the price of a particular coin at any given moment.

One way to consider market capitalisation is as a rough indicator of how stable an asset is going to be. (It’s worth noting that even Bitcoin, the cryptocurrency with the highest market value, is subject to volatility.) A cryptocurrency with a much greater market cap, on the other hand, is more likely to be a more reliable investment than one with a much smaller market cap, in the same manner that a larger ship would easily navigate heavy weather. Digital currencies with lower market caps, on the other hand, are more vulnerable to market whims and may see massive gains or drastic declines.

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As an aside, you can come across references to “circulating supply” or “fully diluted supply” market caps. For Bitcoin, those two figures are the 18.5 million that have been mined (“circulating supply”) and the 21 million that would be mined ultimately (“fully diluted supply). Depending on their methods, some observers will use the currently circulated supply to calculate market capitalisation, while others will use the completely diluted figure.

Why is market cap important?

Price is just one way to measure a cryptocurrency’s value. Investors use market cap to tell a more complete story and compare value across cryptocurrencies. As a key statistic, it can indicate the growth potential of a cryptocurrency and whether it is safe to buy, compared to others.

To demonstrate, let’s compare the market cap of two fictional cryptocurrencies.

  • If Cryptocurrency A has 400,000 coins in circulation and each coin is worth $1, it’s market cap is $400,000.

  • If Cryptocurrency B has 100,000 coins in circulation and each coin is worth $2, it’s market cap is $200,000.

  • Even though the individual coin price of Cryptocurrency B is higher than Cryptocurrency A, Cryptocurrency A’s overall value is double Cryptocurrency B’s.

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Still, it’s also important to note that many cryptocurrencies’ market cap can swing dramatically due to their volatility.

What can you do with market cap?

Market cap allows you to compare the total value of one cryptocurrency with another so you can make more informed investment decisions. Cryptocurrencies are classified by their market cap into three categories:

  • Large-cap cryptocurrencies, including Bitcoin and Ethereum, have a market cap of more than $10 billion. Investors consider them to be lower risk investments because they have a demonstrated track-record of growth and often have higher liquidity — meaning they can withstand a higher volume of people cashing out without the price being dramatically impacted.

  • Mid-cap cryptocurrencies have market caps between $1 billion and $10 billion – they generally are considered to have more untapped potential upside but also higher risk.

  • Small-cap cryptocurrencies have a market cap of less than $1 billion and are most susceptible to dramatic swings based on market sentiment.

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Market capitalisation is a valuable measure for comparing the overall valuation of cryptocurrencies, but market dynamics, the stability of a coin, and the own financial position must also be weighed when evaluating the risks of every transaction.

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