What is Market Capitalization?

Whitney Anderson
Whitney Anderson
Technology Writer
Last updated: May 20, 2024
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Market capitalization or market cap is a financial measure that denotes the value of a digital currency. It has historically been used to measure the worth of companies listed on stock exchanges and it is now considered to be an important metric for comparing different tokens and coins.

The bigger the market value of cryptocurrencies, the more stable they are compared to tokens and coins with smaller market values. Market capitalization gives users, traders, and investors information about how significant a cryptocurrency is in terms of its size and importance.

How Do You Calculate Market Cap?

The formula for calculating this metric is as follows:

Market cap = current price per coin/token × total circulating supply

Current price refers to the most recent trading price at which people are buying or selling the crypto asset across various exchanges.

Total circulating supply refers to all of the coins or tokens that belong to a particular cryptocurrency currently available in the marketplace that can be used by people.

How Do You Calculate Market Cap

Usually, market capitalization is expressed in US dollars or another fiat currency.

For instance, Toncoin (TON) had a market cap of $4.9 billion at press time when priced at $1.43 with a circulating supply of around 3.43 billion.

A little higher than Thorchain (RUNE), which was trading at $523 million with 340 million circulating supplies when priced at $1.54

Maximum Supply vs Total Supply vs Circulating Supply

When computing this financial indicator it’s important to distinguish between maximum supply, total supply, and circulating supply.

Maximum supply means the total number of coins or tokens that will ever be created for some specific cryptocurrencies and it’s often capped based on protocol rules.

Conversely, total supply consists of all coins/tokens ever minted including those already in circulation plus other reserves or those locked into smart contracts such as staking pools or liquidity providers, etc.

On the other hand, for purposes of calculating market cap, the term circulating supply refers to the total number of coins or tokens that are presently available for trade in the market.

For some digital assets, such as those that have a gradual release schedule or holdback of tokens locked in smart contracts for staking and liquidity provision, there can be a significant discrepancy between total supply and circulating supply.

Why Market Capitalization Matters

There are several reasons why understanding cryptocurrency market caps is beneficial:

Relative size estimation: Enthusiasts, traders, and investors are able to evaluate various cryptocurrencies based on their relative sizes. It helps to determine how important and how much adoption a particular digital asset has within the broader cryptocurrency system.

Investment potential: The size of the market cap can indicate whether a given coin has room to grow or not. High market capitalization may mean that it is stable and widely accepted but at the same time, it could suggest that the coin has already reached high penetration levels which may put limitations on its growth prospects. Conversely, smaller cap cryptos tend to generate higher profits but they remain highly volatile with elevated risks involved.

A cryptocurrency’s performance in relation to the total market can be measured by its market capitalization, thus allowing people to benchmark it. As such, the change in the overall market cap of a digital currency over a period of time indicates how well or badly it is growing compared to the general trends in the market.

Generally, high liquidity is associated with large cryptocurrencies that have significant market caps because they are characterized by many buyers and sellers who trade without causing notable price changes. In other words, if traders or investors want to buy highly liquid assets then they should concentrate their efforts on those having relatively high capitalization levels.

Cryptocurrencies with a bigger total supply tend to attract institutional investors and high-net-worth individuals since these projects appear more mature and less risky than smaller ones.

Shortcomings of Market Capitalization

However, certain limitations restrict the usefulness of market capitalization:

1. Circulating supply vs total supply: In reality, however, this concept does not take into account locked coins not released yet or stuck into smart contracts which affect real liquidity and dynamics of markets.

2. No evidence of money flowing in: The amount of money invested in a given coin is not shown by its market cap value. Conversely, when trading volumes are low, any insignificant price change can lead to significant alterations in market cap even if little cash changes hands.

3. Price manipulation: By simulating demand and driving up prices to create an illusion which comes from a low trading volume that can be capitalized upon by such malicious traders for purposes of pumping up their profits through inflating artificially the volume traded.

4. Market volatility: Sometimes rapid changes in prices for certain cryptocurrencies result in quick shifts made upon their capitalizations thereby making it a challenging metric for assessing long-term performance or stability.

5. Utility vs speculation: Furthermore, one needs also keep in mind that cap measure is not determined by what use the coin has. Also, some digital currencies have higher market capitalization mainly because of inflated prices than actual utility or adoption rates which tend to be very unstable.

6. Lack of standardization: Different sources may calculate and report market cap differently – especially concerning finding out the circulating supply of a particular cryptocurrency. This can lead to discrepancies and make it challenging to compare market caps across different sources.

The Bottom Line

Market capitalization as one of the criteria is useful for users, traders, and investors since it indicates how big on a global scale that particular cryptocurrency is compared to others in the market and thus helps them in making informed decisions. However, other factors should be considered along with this metric that would give an overall idea about possible advantages and risks inherent in a specific altcoin.

Cryptocurrency markets continue evolving; hence both seasoned investors and beginners need to understand the key metrics and terminologies involved. To get a holistic image of where the coin might go next, one should also look up the trading volume, liquidity, adoption rate as well and general mood on stock exchanges next door to your place.

Factors Affecting Market Capitalization

There are various factors influencing the market capitalization of a cryptocurrency:

Adoption and real-world use cases – The greater the number of mainstream adoption or real-world uses decided upon for any digital currency; its demand could be driven upwards leading to higher costs and consequently increased market capitalizations. 

Technological developments – Major technological developments or upgrades to the underlying blockchain technology of a digital currency may enhance investor sentiments thereby leading to increased demands as well as higher market cap.

Regulatory environment – Changes in regulations (favorable or unfavorable) can have significant impacts on how much value people attach to them; hence these changes determine if such coins would succeed or fail hence altering their market caps.

Market speculation – At times others are led by speculative behavior resulting from hype driving up both demands and prices therefore inflating long-term unsustainable market caps.

Coin burn or buyback programs – Cryptocurrencies may include mechanisms allowing them to lessen their circulating supplies through means such as coin burns or buyback programs which might make them more scarce thus increasing their overall values.

Staking and yield opportunities – Cryptocurrencies offering staking rewards or other types of yields may attract more investors thus increasing the demand and market cap.

Exchange listings – A digital currency might be exposed to a greater number of people by being listed on major cryptocurrency exchanges thereby increasing its overall market capitalization.

This is another crucial issue to take into consideration concerning the relationship between various cryptocurrencies and how their market capitalization can impact this relationship. The general cryptocurrency sector exhibits some level of correlations where prices tend to move together; however, the degree of such aggregations varies due to factors like market cap, use cases, and technology behind.

For instance, large-cap cryptocurrencies such as Bitcoin and Ether have less correlation with smaller altcoins because they are usually considered established and less speculative. In contrast, the correlation among minor altcoins is high since they are more affected by market sentiment as well as speculative trading.

Portfolio building and risk management can benefit from understanding these correlation dynamics since they enable investors to diversify their investments across cryptos with different levels of association thereby reducing portfolio volatility at large.

FAQs

How does circulating supply differ from market capitalization?

Market capitalization, in this article, refers to the current price of a cryptocurrency multiplied by its available supply. Available supply implies the number of tokens or coins that can be traded at present, excluding those that are held as reserves or frozen using smart contracts. In a different light, market capitalization is like a rough estimate of how much a cryptocurrency is worth, and circulating supply shows how many coins or tokens are in active trading.

What is the correlation between market capitalization and the adoption or utility of cryptocurrencies?

A digital currency does not necessarily have higher market capitalization because it has been adopted or has functional use cases. Some cryptocurrencies may have high market caps which could be due to massive speculation without any practical usage. The lower market cap may mean lower prices despite having many adopters and being more useful than others within their respective sectors.

Can one compare two different cryptocurrencies by looking at their Market Capitalizations?

Yes, it can be used to compare the size and importance of various crypto assets within the market in general. Nevertheless, other factors such as liquidity, trading volumes and specific uses for each coin should also be addressed.

Is it always better when there’s a higher market capitalisation?

Not really. It can indicate an established asset with low volatility yet on the flip side suggest limited potential for growth if already highly adopted. While smaller crypto-currencies offer higher returns they come along with greater volatilities that risk-takers turn into opportunities for profits from volatile markets

Can we manipulate market capitalization?

Certainly, especially for illiquid coins with low trading volumes. By creating artificial demand through low trade volumes and raising prices manipulators increase these currencies’ total values thus inflating their market caps. This limitation is one among others of judging cryptos based on mere calculations of this measurement.

How does liquidity relate to market capitalisation?

Usually, the most liquid cryptocurrencies tend to have large amounts of money invested into them causing their prices to change rapidly and traders to jump in and out of such coins without having large impacts on their prices. However, this is not always true as sometimes cryptocurrencies with larger market capitals may have low liquidity while those with lower caps can have good liquidity.

Why do institutional investors consider market capitalization?

As a rule, people who invest a lot of money like institutional investors and high net-worth individuals tend to be attracted more by the cryptocurrencies that have the largest market capitalizations since they are seen as more stable and less risky than smaller-scale projects. These institutional investors often favor investment into larger assets that are well liquidated and also experience fewer price swings making it important for them to use market capitalization in their decision making.

How does market capitalization differ from trading volume?

This is determined by multiplying the current price of a cryptocurrency by its circulating supply. On the other hand, trading volume refers to the number of tokens or coins that are transacted within 24 hours. High trading volumes indicate increased demand.

Does market capitalization change over time?

A cryptocurrency’s market capitalization is a variable figure that keeps changing with changes in the price of the asset and the circulating supply (if applicable). When more investors put their money into a particular coin, demand and as a result, its price will go up hence an increase in market cap. However, if there is less demand or prices decrease, then this reduces its market cap.

Some cryptocurrencies also gradually increase their circulating supply through scheduled coin releases or mining rewards irrespective of whether prices remain constant. In cases like this one even when the value does not change, increasing supply can lead to a gradual rise in market capitalization.

Thus, it is important to monitor it over time rather than looking at just one snapshot because of its elusive nature. Monitoring trends in total value can give clues about how well different cryptocurrencies are currently doing and what people think about each one.

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Whitney Anderson
Whitney Anderson
Whitney Anderson is a dynamic technology writer and content creator known for her quick learning and strong interpersonal skills. With a passion for community service and travel, she excels in crafting engaging tech content and leading diverse teams. Whitney is eager to bring her tech expertise and creativity to make a significant impact in your organization.

Why Trust Us

Our editorial policy emphasizes accuracy, relevance, and impartiality, with content crafted by experts and rigorously reviewed by seasoned editors for top-notch reporting and publishing standards.

Disclosure
Purchases via our affiliate links may earn us a commission at no extra cost to you, and by using this site, you agree to our terms and privacy policy.

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