What is Market Cap in Crypto?
In crypto, market capitalization (market cap) refers to the total market value of a cryptocurrency. It can be calculated by multiplying the number of coins in circulation by the current market price of the coin.
The market capitalization of a cryptocurrency can highlight the coin's stability in the long run. Especially in crypto, which is known for its volatility, cryptocurrencies with large market caps usually indicate that these coins are more stable and have a more established presence than coins with smaller market caps. However, small-cap coins can experience an upside in growth and extreme fluctuations in price changes. Market capitalization can be an excellent tool for smarter trading decisions.
In this blog, we will explore the concept of market cap in the context of cryptocurrency and examine its significance for traders and investors. We will delve into the factors that affect market cap, how it can be used to evaluate the worth of a cryptocurrency, and its role in determining its place in the market. By the end of this blog, you will have a better understanding of why market cap is an essential metric to consider when trading crypto.
Why is Market Cap Important?
For traders, cryptocurrency prices are only one part of the puzzle. Some novice traders might refer to a currency's high and low prices as an indicator of its true value. For example, when looking at only the price, if Coin A trades higher than Coin B, then Coin A should be worth more.
However, this is a costly assumption, and a lot more information needs to be taken into account, which is why price alone can be misleading to novice traders and investors.
Market capitalization is a much more comprehensive metric on a cryptocurrency that provides an overview of the coin's dominance, popularity, and growth potential. In most situations, when the market cap rises, it can give the idea that the coin is getting more popular and in demand by traders and investors.
Let’s dive deeper into two fictional cryptocurrencies to demonstrate.
- Coin A: Cryptocurrency A has 300,000 coins in circulation, and the coin's market price is $3.00.
- Coin B: Cryptocurrency B has 10,000 coins in circulation, and the coin's market price is $10.00.
Cryptocurrency A has a market capitalization of $900,000, and Cryptocurrency B has a market capitalization of $100,000. In this example, while the price of Coin A is lower, it has a larger value than Coin B. Alternatively, Coin B can experience higher price fluctuations than Coin A because of the low supply of coins and market value.
In Crypto, two major factors can affect the market value of a cryptocurrency: significant price changes in the coin’s price or when the supply of coins increases or decreases in the market.
Another key metric that is helpful to look at is the “fully diluted supply” of a coin, not just the coins in circulation. For example, ApeCoin has over 300,000,000 coins in circulation, with a market capitalization of around $1.4 Billion. However, there is a total supply of 1,000,000,000, which means that the token's market cap can be impacted as more tokens enter the market.
Market Cap Categories
Like the stock market, market capitalization in crypto can be broken down into three major categories, large-cap, mid-cap, and small-cap. Here is a breakdown of cryptocurrencies by market cap:
Large: These coins have market caps of over $10 Billion. These coins can be considered the “blue chips” of the crypto industry. These coins usually have a longer track record than smaller caps and are recognized and adopted by several significant institutions and businesses. Bitcoin and Ethereum are the two highest-valued cryptocurrencies in the market.
Mid: Mid-cap projects range between a market cap of $1 billion and $10 billion. These types of coins are in the process of expanding but carry an inherently higher risk than large-caps because they are not as established. However, mid-cap projects can attract traders and investors due to their growth potential. Some examples of mid-cap projects include ApeCoin, SandBox, and Decentraland.
Small: These coins have a market capitalization of less than $1 billion. Small caps are known to be young projects with fewer economic resources than larger and mid-cap projects and tend to have the highest risk. Additionally, small-cap coins are highly volatile and experience extreme price fluctuations. Small caps also can experience higher growth potential than mid-cap projects.
Comparing the market capitalization of cryptocurrencies can be a valuable tool for your buying and trading strategies. However, it should be noted that even large-caps, like Bitcoin, experience volatility as well due to the inherently risky nature of the crypto industry.
Market cap is a quick and easy method to determine the market value of a cryptocurrency and can be a useful additional tool for traders in their trading strategies. However, we emphasize that market is cap just one tool of many, and we urge all traders to do their own research and weigh other metrics before buying and trading.
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