When looking into cryptocurrency, you’ll hear a lot of obscure terms such as “halving”, “proof of stake”, and “decentralized apps”. But one term you might be familiar with if you’re coming from traditional investing is market capitalization.
Market capitalization is one of the few things cryptocurrencies share with stocks and is based on the same principle. But things are more complex with crypto since it’s such a different type of asset.
It is still something that you should be watching closely whenever investing in crypto or when trying to assess the state of the market at any given moment. Let’s take a closer look at what market cap is in general and in crypto, and why it should matter. We’ll also look at some of the biggest coins in terms of market cap and other factors you should consider when picking one.
Market cap is short for market capitalization. In general terms, the market cap is the total value of a company’s outstanding shares. It is one of the most important things investors look for in a company for many reasons.
Some people may assume that the formula for the market cap is complex, but all you have to do is multiply the number of shares by the price per share and you will get the market cap for this particular company. Once you get this number, you’ll be able to make a much clearer decision on which stocks you should invest in.
The worst thing you can do when looking at a stock or trying to evaluate a company’s value is only looking at the share price. Instead, market capitalization gives you an idea of what the market thinks a company should be valued at, which is the most important figure.
To understand the market cap equation more easily, let’s look at an example. Let’s say that a company has five million outstanding shares at $20. If you multiply $20 by five million, you will have 100 million. That’s the company’s market cap.
There are a lot of things that you can get from a company’s market cap. It can be a good indication of its health. This can also be used to know if a company is under or overvalued. But one of the areas where it makes the biggest impact is during takeover talks. A buyer may look at a company’s market cap to see if a takeover or merger would be profitable or not.
Market cap has a slightly different meaning when it comes to crypto. Since we’re not talking about companies, we can’t talk of mergers or acquisitions there. There is also no central authority deciding how much a coin’s value will be at any given time.
Instead of talking about outstanding shares, we have to talk about coins that are in circulation. You will need to multiply the total number of coins on the market by their value.
The market cap of a crypto can help you tell a lot about how popular a coin really is, which will eventually affect the adoption rate, which is one of the most important indicators for a cryptocurrency. The supply of coins is controlled by the miners and is decentralized in most cases. This means that the market cap of a cryptocurrency is more a reflection of actual activity than market manipulation.
In addition to indicating how big of a presence a cryptocurrency has, it can be used as a comparison tool as well. Most people know that Ethereum is the second coin as far as the market cap goes, compared to Bitcoin. Comparing both market caps offers a visual guide of how much market share Ethereum is gaining, and how much dominance Bitcoin has on the market.
At the time of writing, Ethereum’s market cap is around 30% of Bitcoin’s, but it wasn’t always that way. This shows that Ethereum might be gaining ground and could be a better investment option in the near future.
Looking at the total market cap for crypto can give you a good idea of the overall state of the market. The crypto market’s total capitalization sits at around $1.94T. One important thing to note is that the market cap for crypto wasn’t even half that a year ago. This is a great indicator of health for the crypto markets, although the total market cap has shrunk a little bit since the beginning of the year.
Now that we know a bit more about the importance of market cap when looking at cryptocurrency, let’s take a look at some of the coins with the highest market caps and some of their characteristics.
The number one spot belongs to, you guessed it, Bitcoin. Bitcoin came off its most impressive year to date and soared right over the one trillion mark for the first time in history. One of the main reasons why Bitcoin is still at the top is because of brand recognition. It has the first-mover advantage, and will always be remembered as the first of its kind.
Another thing that separates Bitcoin from other coins is that it is deflationary. Since the total number of Bitcoin in circulation is capped at 21 million, nothing can be done to manipulate the supply and overflood the market through irresponsible fiscal policies. Even with this limit, Bitcoin is still the largest cryptocurrency, and this isn’t going to change anytime soon.
Ethereum, or Ether, has the second biggest market cap of all cryptocurrencies at $380,560,811,173 at the time of writing. What’s interesting about Ether is that it wasn’t meant to be a transactional cryptocurrency. Instead, it is to be used as “fuel” to power apps on its blockchain.
The Ether blockchain has been used for all sorts of projects like games and even to launch other coins. While speculation drives a lot of Ether’s value, it’s the underlying usage that makes this one interesting and almost ensures that there will always be a demand for it.
What was once used only as a tool to trade on the popular exchange and pay fees is now being used for everything from payment processing to paying for trips. The coin took over Tether’s position at number three, but it’s still very close.
Tether is very different from other coins on this list in that it’s a stablecoin backed by real assets. It is the most well-known stablecoin on the market with a valuation of about $62,617,805,694.
While its market cap is nowhere close to Bitcoin, it is still the biggest in terms of transaction volume, making for almost 50% of all crypto transactions made every day. The value of Tether is pegged to the US dollar, and if you look up its value, it will always be $1, and it’s meant to stay that way.
Cardano is at number five with a market valuation of $60,094,795,824. Cardano is both used for transactions and as a platform for smart contracts.
One of the main differentiators of Cardano is its adoption of a proof-of-stake protocol. This eliminates a lot of the problems that come with proof-of-work. This competitive model pushes miners to constantly solve increasingly difficult equations to unlock blocks. This causes a lot of energy to be expanded and slows down transactions. Cardano seeks to change that and is set to have a bright future.
No, it isn’t. It should only be one of the factors and many issues come with relying solely on market cap. One of the problems with using the market cap for calculating the value of a coin is that these can be minted overnight with no warning, which can cause the value to be inflated. Many starting projects will have a low price coin with a huge supply, which can artificially inflate its value.
There is also the fact that a large amount of crypto ends up being stolen or lost every year. These coins are irrecoverable but still get counted in the total supply, even when they’re out of circulation.
Instead, the market cap should only be used to get a ballpark idea of a coin’s dominance in the market, that’s it. You will need to look at other metrics such as adoption rate and trading volume within the last 24 hours if you want a clearer picture. It’s also a good idea to look at its progression over the years and how well received the projects behind them are.
Coin market capitalization is something every crypto investor should understand and be interested in. It is not the end-all be-all, however, so you’ll need to do more extensive research if you want to find one or a few winners.