The market capitalization (or market cap) of a cryptocurrency is a measurement of its market value. In other words, it’s a measurement of its popularity. It indicates how much capital is currently invested in a cryptocurrency. The market cap of a coin is calculated using the following formula:
Current market price x number of coins in current circulation
Let’s look at the following examples to understand it better:
- The current market price of coin A is $5,000 USD. Its circulating supply is 5,000,000 coins
Current market price (5,000) x number of coins in current circulation (5,000,000) = 25,000,000,000
The market cap of coin A is 25 billion USD
- The current market price of coin B is $50 USD. Its circulating supply is 1,000,000,000 coins
Current market price (50) x number of coins in current circulation (1,000,000,000) = 50,000,000,000 USD
The market cap of coin B is 50 billion USD
So, although the price of coin A is considerably higher than the price of coin B, the market cap is actually less. How so? Because the circulating supply of coin B is higher than coin A, so much so that when you multiply it by the current market price, it has a higher market cap. That is why the price of a cryptocurrency is not an indicator by itself of its market value and popularity.
- Looking at price alone isn’t enough, as this is dependant on supply, so only gives a small part of the picture
- The market cap on the other hand includes the price and supply, so gives the whole picture
Cryptocurrencies can be categorized into large-cap, mid-cap, and small-cap. This can give an indication of how safe an investment it is.
- Large-cap: Although there is no set definition, they can be generally defined as about the top 10 or so cryptocurrencies by market cap. They include the most famous cryptocurrencies, such as Bitcoin, Ethereum, and XRP. They will generally be the least volatile cryptocurrencies (although by their very nature can still be very volatile at times), and have the most liquidity. As such, they can be considered the safest investments.
- Mid-cap: They can be generally defined as being about the 10 – 50 ranked cryptocurrencies by market cap. They will possess more potential for growth than large-caps, but also carry more risk. Ultimately, some of these mid-caps will succeed, but some will not. That’s why it’s important, if you’re looking to invest, to do your own research into what cryptocurrencies may be a good investment in this range.
- Small-cap: These are the lowest ranked cryptocurrencies by market cap. These are also the highest risk for potential investors. They haven’t proven themselves yet in the market and the jury is still out on these cryptocurrencies on whether they will be a success or not. They may well be cheap, and some investors will be lured in this by factor. But its especially important to do thorough research into cryptocurrencies in this bracket, into their potential merits.