With so many different cryptocurrencies flooding the market, it’s important to understand ways that we can determine the risk and potential upside of various cryptos. That’s why market cap in crypto is important to understand.
Market cap in crypto is the total dollar value of a token multiplied by the total amount of currency that’s currently in circulation. A cryptocurrency’s market cap highlights the long-term stability of an asset. Generally, crypto with a large market cap indicates more stability, smaller caps are more susceptible to market sentiment.
In general, most people tend to look at the market cap as an estimate of the overall stability of a cryptocurrency. The thought is, the greater the market cap, the better a cryptocurrency will perform overall in a volatile market.
Bitcoin is a good example of crypto with a large market capitalization, which seems to do well overall. However, that’s not to say that it doesn’t have its ups and downs.
What about circulating supply and fully diluted supply? Great question! Circulating supply is the total supply of cryptocurrency that is currently flowing through the market. Fully diluted supply is the total supply of crypto, including the amount that is not currently circulating in the market.
Depending on the preferred method of who is supplying the market cap data, some will measure the cap using the currently circulating supply, while others will use the fully diluted supply.
Make sure you are aware of how a market cap is being measured if you are using the data to help with an investment decision.
Market cap in crypto is important because it’s used as a tool to measure the overall potential of a certain cryptocurrency and to compare value across other cryptocurrencies. Market cap can help indicate the growth potential of certain crypto and whether it’s safe to buy, compared to others.
Below is an example of how you can use market cap to help compare value across various cryptocurrencies:
- Say Cryptocurrency A has 200,000 coins in circulation and each coin is worth $1, it’s market cap is $200,000.
- Say Cryptocurrency B has 50,000 coins in circulation and each coin is worth $2, it’s market cap is $100,000
This shows that even though the individual price of Cryptocurrency B is higher than Cryptocurrency A, the overall market cap of Cryptocurrency A is double Cryptocurrency B’s.
It is still important to note that many cryptocurrencies’ market cap still fluctuates drastically because the overall market is extremely volatile.
With the knowledge of a cryptocurrency’s market cap, you are able to compare the total value of one crypto with another, allowing you to make better investment decisions. Cryptocurrencies are classified into three categories according to their market cap.
Small-cap: Small-cap cryptocurrencies have a market cap lower than $1 billion and are at the highest risk for fluctuations based on market sentiment.
Mid-cap: Mid-cap cryptos have market caps between $1 billion and $10 billion. Mid-cap cryptocurrencies generally have greater potential upside, but also higher risk.
Large-cap: Large-cap cryptos, like Bitcoin and Ethereum, have a market cap of over $10 billion. These are considered to be the lowest risk investments because they have already proved a positive track record of growth. Also, large caps can withstand higher volumes of investors cashing out without the price being impacted too much.
Knowing what market cap in crypto is and how it can help you determine risk when investing in cryptocurrency is important, especially considering how volatile the current market is.
Always do your own research, even if a certain crypto has a large market cap.