Topics Crypto
Bybit Learn
Bybit Learn
Nov 1, 2021

Explained: What Is Crypto Market Cap (Capitalization)?

Market capitalization in crypto is the monetary value of a token or coin multiplied by the amount of the currency that’s currently in circulation. The token’s market cap highlights the stability of an asset in the long term. While crypto is undeniably volatile, cryptocurrencies with a large market cap usually indicate that investments are more stable, as smaller caps crypto are more susceptible to the overall market sentiment. 

Why Does Market Cap Matter?

In the cryptocurrency market, the price alone can be a misleading indicator when it comes to determining a project’s true potential and value. Even the largest cap crypto, Bitcoin, may skyrocket or dip wildly based upon factors such as public enthusiasm, quick changes in circulating supply, or even a crypto ban in certain countries. Events such as these often generate an impact on the overall picture of a crypto’s ultimate potential. 

What savvy crypto investors like to see is a coin or token that possesses a relatively low supply but a high value. That said, crypto investors use the market cap as a key indicator to compare the value of cryptocurrencies and determine their potential growth. Overall, high market cap assets usually translate to that investor being more willing to pay for the assets.

For example, when crypto enthusiasts refer to the total supply of a cryptocurrency, they sometimes use the term fully diluted supply (FDV). A fully diluted market cap is calculated based on the value of all the coins in a cryptocurrency, not just the ones in circulation. One of the reasons Bitcoin (BTC) continues to do well is that its fully diluted supply is only 21 million. Currently, there are over two million of these coins left to be mined, as the total circulating supply of BTC is more than 18 million. As a result, BTC is one of the best-performing assets, driven by its scarcity and utility. When discussing a token’s supply, it’s critical to differentiate whether one is using FDV or circulating supply as their standard. Taking market capitalization into account allows one to see the macro picture for more informed investment decisions.

Identifying a Desirable Crypto

A desirable cryptocurrency is one that persuades investors that its future will turn out even better than its history charts. Just as gold often serves as the standard for the precious metals market, the crypto community tends to look to Bitcoin as the standard-bearer. As the value of 1 BTC rises, so does Bitcoin’s market cap.

On January 1, 2015, the price of BTC was hovering around $320 and the market cap was at $ 4.32 billion. In just five years, both of these numbers would rise, with the price rocketing to $7,196 and the market cap reaching over $130 billion. Today the figures are up to nine times as high over $60k for 1 BTC. Regardless of how attractive a given crypto project may be — investors like to mull over the use cases of various coins and tokens — the cryptocurrency’s market cap increases in proportion to a fairly low supply and a high value for each coin. 

For novice investors, simply looking at the market cap can help one avoid the most common pitfalls and increase the chances of success. Although crypto influencers should always be viewed with a healthy dose of skepticism, there’s a reason why they mention market cap so frequently: it’s one of the most reliable and useful pieces of data an investor can rely on.

Classifying Cryptocurrencies

Of course, not all market caps are created equal. As with stocks, the cutoff to join the large market cap of cryptocurrencies is currently around $10 billion. For those accustomed to investing in the regular stock market, purchasing large caps is akin to buying blue-chip stocks. Mid-cap projects are those in the range between a market cap of $1 billion and $10 billion. A small-cap designation means that a currency’s total market cap is currently less than $1 billion. Of course, the process that one uses when buying cryptocurrency is different, due to its volatility. Cryptocurrencies may grow, and they can also flounder, and a currency’s market cap designation is never considered final. 

Ultimately, all large-cap cryptocurrencies started off as small caps at one point. A shrewd investment strategy always includes an investigation into a project’s growth potential, and monitoring its market capitalization and classification is an integral step. In the crypto world, a lot of engaging founders and thought leaders have had an effect on the market. There are even instances of market movement due to someone’s tweets. The data would indicate, however, that most people should watch the numbers and market cap instead of heeding the advice of characters who may or may not have considered the interests of the general public when sharing their opinions about certain coins or tokens.

Large Cap 

Some of the most well-known large-cap cryptocurrencies currently include Bitcoin (BTC), Ethereum (ETH), Cardano (ADA) and Binance Coin (BNB). Ripple (XRP) has a current market cap of $50 billion — and a fully diluted market cap of more than $100 billion. These are the coins that people will hear about on mainstream media and from networks centered on traditional finance. A large-cap coin is like a celebrity that’s a household name. Crossing into the large cap territory is a big moment for any project.

Although the cryptocurrency market is still considered volatile at this level, investors tend to classify large-cap cryptocurrencies as lower-risk because they’re more established, having demonstrated sustainable growth and liquidity. They’re also a bit less likely to plummet so dramatically, even when there’s a high volume of market investors pulling out of their investments. However, as anyone who’s followed the crypto markets for over a year can attest, nothing in crypto is impossible.

Medium Cap (Mid-cap)

Although they haven’t hit that $10 billion mark yet, these coins tend to be on the move. Examples of popular mid-cap projects include Polygon (MATIC), Internet Computer (ICP), Axie Infinity (AXS), Stellar Lumen (XLM) and VeChain (VET). As of the time of writing, Algorand (ALGO) has crossed over into large-cap territory. Although medium cap projects may carry more risk when one is investing, they also may confer more rewards for those who get in early. After all, the chance to buy a BTC at $100 has come and gone. However, to use another example, the opportunity to get in with MANA is still available. Its attractive price (currently below $3), multiplied by its circulation supply of around 18 billion, gives a market cap of around $5 billion. Market capitalization is a crucial element that investors ponder when deciding whether or not to get involved with a medium cap project.

Small Cap

Smaller cap cryptocurrencies tend to attract a lot of chatter online. For those looking for risky yet potentially lucrative projects to add to their portfolios, small-cap cryptos can be incredibly alluring. These days, many of the decentralized finance (DeFi) projects that are sparking excitement are still considered small-cap. Projects like Nord Finance (NORD) may boast exciting new products, such as advancements in liquidity mining, but many of these small-cap cryptos are still relatively new. While they’re still proving themselves as small caps, investors get to know their features and offerings better.

Comparing Values of Cryptos

Since the market cap fluctuates along with a crypto’s price, it’s important to receive up-to-the-minute updates. Most crypto aggregators and exchanges provide a real-time update of the asset’s market cap, price and circulating supply. For example, CoinMarketCap and CoinGecko offer extensive updates of the cryptocurrencies while Bybit’s market offer live updates with the market’s 24hour turnover rate. While every crypto investor has their own way of tracking these indicators, there is a multitude of resources available online. Taking market capitalization into consideration is a hallmark of more sophisticated investors.

Crypto Weighted Market Cap Strategy

For investors seeking to add another element to their investment strategies, weighted market cap assessments can be helpful. For example (using small numbers for ease of calculation), if the market cap of Crypto A is $20 and the market cap of Crypto B is $80, then the sum of both market caps is $100. A person who’s investing $100 could allocate $20 of their funds to Crypto A and $80 to Crypto B. Adopted from the centralized finance (CeFi) world, weighted market capitalization strategy obviously favors investing in coins that wield a heftier market cap. There are some who believe that these tactics don’t work as well in the crypto world as they do in traditional finance, but many others do apply this investing strategy on a daily basis.

What Could Affect the Market Cap?

The factors that affect market capitalization are supply and price. A skyrocketing price causes market capitalization to rise significantly. With the supply always playing a part of the equation, however, investors get a clearer picture of any crypto’s future when they eschew temporary excitement over prices and look at the market cap data.

The Bottom Line

As an investment tool, market cap can be extraordinarily helpful. As is the case in any investing endeavor, those who want to participate in the crypto world should use actual data. It can be very tempting — with cryptocurrency, especially — to make emotional decisions. The media hypes up each bull run of Bitcoin and other altcoins, but it tends not to cover prolonged bear markets with the same breathlessness. A crypto investor who’s willing to take market cap into account is using the same principle as a pilot who checks their instrument panel at the first sign of trouble. Instead of panicking and looking outside, this pilot knows that checking the most current data will help them make effective decisions so they can soar into the sky once again.