Cryptocurrency market cap is a popular topic among those affiliated one way or another with the crypto market, and for a newbie, you may not understand what this is about.
However, if you are just getting into the world of crypto and are wondering what people mean by cryptocurrency market cap, here is an excellent chance to learn everything about it but first, let’s look at market capitalization in general before going into more details.
What is Market Capitalization?
Market capitalization is the total value of all the shares of a company or the worth of a company as determined by the stock market. It can also be defined as the total value of a company’s publicly traded shares on the stock market.
For a regular business or company, you can calculate it by multiplying the number of shares with the current share price. For example, a company has 40 million shares and is selling them at a rate of $50 per share; this means its shares will have a market cap of $2 billion.
However, this is also very similar to the cryptocurrency market cap. The only difference is that you are no longer dealing with a company and its stocks; instead, you can assume each cryptocurrency is a company of its own.
What is a Cryptocurrency Market Cap?
Cryptocurrency market cap is the total value of a specific cryptocurrency’s coins that have been mined or in circulation. This is calculated by multiplying all the coins that have been mined or the total number of coins in circulation by the value or price of a single coin.
For example, if 50,000 bitcoins have been mined since its launch, and the price of a bitcoin is $50, the market cap of bitcoin would be $2.5 billion. Note that this same calculation method can be used for any cryptocurrency.
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Types of Cryptocurrency Market Cap?
Cryptocurrencies are categorized into three groups with market caps. This allows you to make important investment decisions by comparing the value of one cryptocurrency to another. So here are the three categories of cryptocurrencies under market capitalization.
These are the cryptocurrencies with a market cap of more than $10 billion. Some excellent examples of such cryptocurrencies are bitcoin and ethereum. These coins have lower risks than others because, over the years, they have demonstrated a consistent level of growth, and they can withstand a large number of cashouts with any sudden alterations in their prices.
So as an investor, these are the type of coins you should consider first before the others because they stand a better chance of bringing higher returns in a short time and less chances of dramatic price reduction.
The cryptocurrencies in the mid-cap category have market caps of $1 billion to $10 billion. They have a higher risk than those in the large-cap categories, but they are also expected to experience rapid growth and are less prone to dramatic changes in price.
Suppose you are looking to invest in crypto. In that case, this category is also an excellent choice because they have more untapped potential, so they are still in the process of expanding regardless of the higher risk they possess.
Small-cap cryptocurrencies have a market cap of $300 million to $1 billion; they are more susceptible to sudden fluctuations based on market demand. These cryptocurrencies are very sensitive to economic changes, so they have more volatility and liquidability.
In addition, regardless of the high risk due to high volatility, these cryptocurrencies still have more significant growth opportunities than large and mid-cap cryptocurrencies, so they are still good for investment purposes.
These are the smallest group of cryptocurrencies, with a market cap of $50 million to $300 million; they hold the highest risk compared to the other groups, and the chances of growth are sometimes uncertain. So this group of cryptocurrencies may not be recommended for people without adequate experience with the crypto market.
However, since people cannot foretell the future of these currencies, there is still a high chance of rapid growth at any point in time.
What is the Importance of Cryptocurrency Market Cap?
The fastest and most accurate way to measure the value of a cryptocurrency is with its price, and you can use this market cap to compare the value of one cryptocurrency to another. Market cap can indicate the potential of increase and growth of a cryptocurrency so you can tell if it is safe to invest your money or buy them compared to others.
Here is a simple example of actual cryptocurrencies that you may be familiar with, showing how to use the cryptocurrency market cap to determine the best cryptocurrency to buy or invest in.
- If bitcoin has 500,000 coins in circulation or there are 500,000 bitcoins that have been mined, and a single bitcoin is worth $2, the market cap is $1,000,000.
- If there are 250,000 ethereum in circulation and each coin is worth $3, the market cap is $750,000.
- Now you can see that even when the price of a single ethereum is higher than bitcoin, the overall value of bitcoin is still higher, so it has better growth potential and is safer to buy.
Factors That Affect Cryptocurrency Market Cap
If you now understand the cryptocurrency market cap, you may also wonder what factors can increase or decrease the value of cryptocurrencies. However, the first thing that may come to mind is demand.
The higher the demand, the higher the value of the cryptocurrency market cap, but several things can influence their stability, fluctuations, increase and decrease of cryptocurrencies. So let’s take a look at some of those factors.
Node counts can accurately tell the number of active wallets in the same network to determine the community’s strength. A high node count indicates a stronger community and increases the chance for the cryptocurrency to withstand and overcome minor and major crises.
Market and economic changes will not easily influence cryptocurrencies with higher node counts. To access a cryptocurrency’s node count, you can search it on google to check the currency’s home page.
In many countries, the decentralization of these digital currencies tends to make certain governments or central bodies uncomfortable; because they do not have any control over the currencies. So they are constantly looking for ways to gain some control.
Government agencies may not be able to control most cryptocurrency transactions, but they can control how these crypto are traded within their country. This means they can change the rules at will and make crypto investments less favorable, which may result in reduced cryptocurrency market cap or value.
Just as the action of certain government agencies can significantly affect the cryptocurrency market cap, the internal regulating bodies of these coins can also cause the value or market cap of the crypto to either drop or increase.
Cryptocurrency developers rarely abide by a static set of rules. Instead, they can adjust the rules anytime based on the needs of the community they serve or stakeholders and investors to maintain stable governance.
Cost of Production
The cost of producing these cryptocurrencies is another major factor affecting the cryptocurrency market cap. This is because cryptocurrencies are created through mining, and the miners have to take their time to solve complicated mathematical problems to verify the next block on the blockchain using specialized hardware or servers.
These miners earn a network fee or virtual tokens for their work. However, the decentralized cryptocurrency will not function or exist without the network of miners.
So if the mining cost increases, it is expected that the value of the crypto also increases; if not, there won’t be enough profit and finance to keep the network running. This can quickly result in less production and supply of crypto, which will also affect its price.
Cryptocurrency exchanges are platforms where people buy, exchange and sell cryptocurrencies. However, many of these exchanges usually list the most popular and mainstream cryptocurrencies while completely ignoring the smaller tokens.
This can result in limited access to some tokens for investors because if a cryptocurrency is available on many exchanges, more people will buy and sell them, and the more the demand for a token, the more the value will increase.
It is easy to guess that supply and demand is one of the critical factors that can determine the value of cryptocurrencies. When demand is higher than supply, the cryptocurrency gains more value.
The increase in demand for a cryptocurrency can also result from increased awareness and an increase in its utility. So when fewer coins are available for people to buy, the price will increase.
However, the governing teams of some cryptocurrencies can also burn excess tokens by sending them to unrecoverable addresses to prevent oversupply and a decrease in the value of the coins. They can also choose to release more tokens into circulation when there is a significant shortage in supply.
With new cryptocurrencies being launched every day, the number of existing tokens will keep increasing, and currently, there are more than 12,000 cryptocurrencies in circulation. These coins include celebrity coins, memes coins, soccer teams coins, and many more. Also, among these numerous coins, there are also some viable coins with high growth potential and a strong network of users.
However, due to the numerous coins in circulation, if there is a useful application for any cryptocurrency on the blockchain, it will gain more value and reduce the value of its competitors, especially when it improves on a competitor’s limitation. However, when another competitor gains more value, this coin may likely lose its high value again.
One of the commonest reasons for a cryptocurrency to increase in demand is awareness, and the best place to get informed or spread information is on social media. Social media has a major influence on people, which can increase or decrease the value of a cryptocurrency.
Cryptocurrency exchanges often give updates on various cryptocurrencies or blockchains to hype a specific coin or to keep people informed. People can use these updates to determine if they will trust and invest in certain coins after getting adequate information about the coin, and this can result in higher demand for certain cryptocurrencies.
However, while these exchanges may give accurate information, it is essential to confirm with other sources to ensure the information is accurate and genuine.
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All cryptocurrencies are volatile and experience frequent fluctuations in value, but regardless of this defect, cryptocurrencies are still regarded as the currency of the future. This is because some are more stable than others which means stability is possible with all cryptocurrencies.
Moreover, with the increased interest these coins are getting from people of influence coupled with governments’ determination to control the currency, by all means, it proves that cryptocurrencies are here to stay and will eventually become something big in the near future. However, only those who can stay acquainted with this trend can enjoy the future of these new digital currencies.
Nevertheless, when investing in crypto, you should consider market trends, your financial situation and the stability of the cryptocurrency to mitigate risk in your investment.
In addition, with this guide on cryptocurrency market cap, you can now compare the value of various tokens to determine the best one for your investments, and here you can also check out how to invest in crypto for beginners.