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Market capitalization (or market cap) is a financial metric that can be used to indicate the total value of a cryptocurrency.
It has traditionally been used to measure the market value of companies traded on stock exchanges, and now has become a key metric for assessing the relative size and importance of different established and new coins and tokens.
Cryptocurrencies with larger market values tend to be more established and less volatile than coins or tokens with smaller market values.
How to Calculate Market Capitalization
The formula for calculating market cap is simple:
Market cap = current price per coin/token × total circulating supply
The current price refers to the most recent price at which the cryptocurrency is being traded on various exchanges.
The total circulating supply refers to the total number of coins or tokens of that cryptocurrency that are currently in circulation and available to the public.
Market capitalization is typically expressed in US dollars or another fiat currency.
For example, at a price of $1.43 and circulating supply of 3.43 billion, Toncoin (TON) had a market cap of $4.9 billion at the time of writing.
THORChain (RUNE) was trading slightly higher at $1.54 with a circulating supply of 340 million and a market cap of $523 million.
Why Market Capitalization Matters
Understanding a market cap is useful in analyzing cryptocurrencies for several reasons.
- Relative size assessment. Market capitalization allows enthusiasts, traders and investors to compare the size and significance of different cryptocurrencies.
- Investment potential. Market cap can indicate a cryptocurrency’s potential for growth and stability. While a high market capitalization can point to stability, it can also suggest that the coin or token has already reached a significant level of adoption, potentially limiting its future growth potential. Conversely, cryptocurrencies with lower market caps can offer higher growth potential but with higher volatility and risk.
- Benchmarking. Market capitalization can serve as a benchmark for comparing a cryptocurrency’s performance to the overall market. Investors often track changes in market cap over time to gauge the growth or decline of a particular digital asset.
Limitations of Market Capitalization
While market capitalization can be a useful metric, it does have its limitations:
- Circulating supply vs total supply. As market cap is calculated from circulating supply, it does not take into account that some coins or tokens may be held back for release or locked in smart contracts, which can affect actual liquidity and market dynamics.
- Not indicative of money inflow. Market cap does not represent how much money has entered the market. Low liquidity can result in a relatively small price variation having a significant impact on market cap despite a small amount of money changing hands.
- Price manipulation. Market manipulators can capitalize on low trading volumes to artificially inflate market cap.
- Market volatility. The high volatility in some cryptocurrency prices can change market cap rapidly.
- Utility vs. speculation. Market capitalization does not take into account the utility or purpose of a cryptocurrency. Some cryptocurrencies may have a high market cap primarily because of speculation rather than genuine utility or adoption.
The Bottom Line
Market capitalization is a useful metric in that provides a snapshot of a cryptocurrency’s relative size and significance in the market, which can assist users, traders and investors in making informed decisions.
However, it should be used in conjunction with other metrics and factors to form a comprehensive view of a cryptocurrency’s potential and risk.
As the cryptocurrency markets continue to evolve, understanding the key metrics and terminologies is important for seasoned investors and newcomers alike.
