There is a lot of jargon that is used in the crypto investing world.
When talking about digital wallets, there are hardware, software, and desktop options. When discussing types of coins, there are those that utilize ‘proof-of-work’ and others that are ‘proof-of-stake’. Then there are the nicknames and trading names for thousands of coins from BTC to DOGE to ETH. One of the common concepts discussed, along with these, is the crypto market cap.
What is the cryptocurrency market cap?
In economics, a market cap is the total available market share for a commodity – in other words, the total value of that service or item. Therefore, the cryptocurrency market cap is the total value of a cryptocurrency at the time of analysis.
With traditional assets and stock trading, this number is ascertained by multiplying the share price by the amount of available shares. In simple terms, if a company has 100 shares and each is valued at US$1, then the market cap of the company is US$100. To determine a stock market capitalization, it is necessary to multiply the total number of shares outstanding by the share price. The cryptocurrency market cap is calculated similarly but is the number of coins in circulation multiplied by the price of the coin.
The market capitalization, or market cap, can fluctuate by the hour or even to the minute. More established coins such as Ether and Bitcoin are more immune than smaller coins to massive changes in their market cap value. However, no currency is independent of the economy and inflation, so it is important to constantly be aware of this number.
Supply and demand
Supply and demand also play a role in how a market cap is determined. For example, Bitcoin has a high barrier of entry for miners, a very limited supply and a good reputation for returns. Therefore, Bitcoin is very expensive to buy and has a high market cap. Ether (the native coin of the Ethereum blockchain), meanwhile, has millions more coins in circulation than Bitcoin, but because each coin is valued far lower, it has a substantially smaller market cap.
The big picture
The market cap for a particular cryptocurrency can help investors decide on how they want to spend their money. It provides insight into how popular a new coin is and how risky it is to invest in it. A market cap analysis will also show if the market is becoming oversaturated and needs to be corrected or if a trader has stumbled on a new opportunity.
When investing in any type of cryptocurrency, it is incredibly important to do your own research, regardless of the reputation of a coin. Looking at the market cap is a good first step to sustainable and profitable investments.