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What is Market Capitalization in crypto? Does it matters?

20-Sep-2022 Sourabh Agrawal
What is Market Capitalization in crypto? Does it matters?

Key Takeaways

  • Market capitalization is derived by multiplying the cryptocurrency's price by the number of coins in circulation.

  • Market Cap = Current Price x Circulating Supply.

  • Fully Diluted Market Cap = Current Price x Total or Max Supply.

There are endless media stories about how many new and young billionaires have been made by the crypto market. When cryptocurrencies emerged as a new asset class, many traders and investors compared them to stocks. Many indicators and metrics are identical in both, and one of them is market capitalization.

Market capitalization is a crucial indicator for stock market investors. But for the crypto world, it is not exactly the same. As cryptocurrencies are relatively new, there is not much utility known about this critical metric. Here's what cryptocurrency investors should know about market capitalization and how it should impact your strategy.

What is Market Cap?

The market capitalization of a cryptocurrency represents its overall value. Stock market capitalization is derived by multiplying the share price by the number of shares, while the crypto market cap is derived by multiplying the cryptocurrency's price by the number of coins in circulation. It can also be referred to as the multiplication of the total number of coins mined or staked by the price of a single coin.

Market Cap vs. Fully Diluted Market Cap

You may see references like "market cap " or "fully diluted market cap" on various marketplaces. Obviously, there is a difference between them. Whereas the market cap is based on the current circulating supply, the diluted market cap is based on max or total supply. It implies that a fully diluted supply is calculated by multiplying the total number of tokens that will eventually be mined by the price of the coin. 

Market Cap = Current Price x Circulating Supply.

Fully Diluted Market Cap = Current Price x Total or Max Supply

For example, with Bitcoin, those two figures are the ₹30.15 T that has been mined (market cap) and the ₹33.06 T that will potentially be mined (fully diluted market cap). Some observers will use the presently circulating supply to calculate the market cap, while others will use the fully diluted value.

However, Keep in mind that the circulating supply of a cryptocurrency is more important than the overall supply. After all, only the circulating supply is accessible on the market.

Importance of Market Cap

Price of a cryptocurrency is not an efficient way to assess its value. Market capitalization is used to present a more complete story and compare the value of cryptocurrencies. As an important metric, it can show a cryptocurrency's development potential and whether it is safe to acquire in comparison to others.

For example, the current price of XRP is less than that of Solana. But, the market cap of  XRP is greater than Solana. Therefore, the market cap is used to compare the total value of one cryptocurrency to another, allowing you to make better-investing decisions.

Impact of Market Cap on Investment strategy

The stock market's market capitalization helps significantly in making investment decisions. It indicates a company's investment category, such as small cap, mid cap, or big cap. The word "market cap" is commonly used to define the worth of a company, which may be reflected in how risky an investment in the company is. Large-cap stocks often have fewer risks than mid-or small-cap stocks, but they rise more slowly.

In cryptocurrencies, the market cap does have this same utility and is not yet properly categorized into these investment groups. Bitcoin and Ethereum, who are considered to be large-cap, are also volatile. So, there is no point in doing these categorizations.

Knowing the cryptocurrency market cap is useful if you want to understand the potential of a certain coin, but it should not be as important in your investing decisions as it is in the stock market. While market capitalization has less relevance in crypto trading, it might potentially influence how you invest in cryptocurrencies. It may also provide us with a fact-based view of how cryptocurrencies are performing—a much-needed source of impartiality away from social media.

You can now track the market capitalization of cryptocurrencies on CoinGabbar and get an idea of how popular each coin is. It also provides the most popular cryptocurrency index with all the essential financial data for cryptocurrencies, assisting your cryptocurrency trade or investment decisions.

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