What is Market Capitalization in Cryptocurrency?

The cryptocurrency market opened up the doors of financial inclusion, both for the unbanked and the banked. For the first time in many decades, we have a financial system that is not totally reliant on the traditional banking system.

Spearheaded by Bitcoin, cryptocurrencies at a time became a 3 trillion-dollar market. However, the crash in the price of Bitcoin after peaking to over $60,000 per BTC, multiple Fears, Uncertainties and Doubts (FUDs) in the market, the crashing of altcoins and a series of panic-selling caused the market to tank to about 800 billion dollars in Dec 2022. As of April 2023, the market cap is hovering in the region of $1.2 trillion.

Nevertheless, there is still an opportunity for cryptocurrency enthusiasts to take advantage of the price declines to “bag” more of their favorite coins and tokens. But before you make this investment, you must have first understood what market capitalization means in cryptocurrency and how to take advantage of it.

Related: 9 Things You Should Know About Cryptocurrency

What is Cryptocurrency Market Capitalization?

Market capitalization, also called market cap, is the total value of a cryptocurrency. It is the total dollar-based value of a publicly traded token or coin. Market cap helps prospective investors know whether the cryptocurrency they want to invest in is profitable or not. It also helps investors in token valuation, thereby making a buy or sell decision.

How is Market Capitalization Realized?

To get the market capitalization or valuation of any cryptocurrency, you need to understand two things. The first is the mined crypto and the second is the market price. These two are critical fundamentals that help determine the valuation of cryptocurrencies.

On the one hand, we have the mined cryptocurrency, being the total number of cryptocurrencies that are available for purchase. If you are using cryptocurrency tracking platforms like Coingecko and CoinMarketCap, it is called the “circulating supply.” It is so-called because it refers to the number of coins/tokens that have been put out for sale.

On the other hand, we have the market price, which is self-explanatory. The market price of any cryptocurrency refers to the current or real-time price of the coin.

With these two (the circulating supply and the market price), you can get the market capitalization of any cryptocurrency.

Here is an example to explain market capitalization:

Let’s say we have two cryptocurrencies named Coin A and Coin B. Now, we want to find out the market cap of each of these.

We consulted CoinMarketCap and saw that Coin A has a circulating supply of 500,000 coins, while Coin B has 750,000 coins in circulation or available for purchase.

To get the market capitalization, we are now to multiply the current price of each of those coins with the circulating supplies.

For example, if the market price of Coin A is $1.5, it means that we would multiply $1.5 by 500,000 (the circulating supply of Coin A). That would give us $750,000 as the coin’s market capitalization.

For Coin B, we assume that the market/current price is $0.5 per coin and it has a circulating supply of 750,000. What we would do is multiply the current price of $0.5 by the circulating supply of 750,000. The market capitalization becomes $375,000.

From the above examples, you can see that it is pretty easy to find out the market capitalization of any cryptocurrency.

However, for some reason, you may not want to go ahead with investing in any cryptocurrency simply because of the same market cap. We would talk extensively about that in the following sub-headings.

Categorization of Cryptocurrencies According to Market Capitalization

Cryptocurrencies can be categorized under large-cap, medium-cap and low-cap.

• Large-cap cryptocurrencies: These include cryptocurrencies that have a market capitalization of more than $10 billion. They include Bitcoin (BTC), Ethereum (ETH), Binance coins (BNB), Ripple (XRP), Cardano (ADA), etc. Large-cap cryptocurrencies are considered to be low-risk investments because of their track records, high liquidity and massive adoption.
• Mid-cap cryptocurrencies: These are cryptocurrencies with a market capitalization between $1 billion and $10 billion. They are usually of high risks but with building investor confidence. Examples of mid-cap cryptos with good utility include Tron (TRX), Litecoin (LTC), Uniswap (UNI), COSMOS (ATOM), etc
• Low-cap cryptocurrencies: These are relatively new cryptocurrencies with very low investor confidence and a market capitalization of less than $1 billion. They are highly volatile and can greatly swing upside or downside based on market sentiments or little news. Most meme coins aside from the very popular ones and new crypto projects fall under this category.

Using Cryptocurrency Market Capitalization for Risk Assessment

One major reason why cryptocurrency enthusiasts are particular about the market cap of a coin is that they want to make informed investment decisions.

If this is the same reason why you are making the evaluation, understanding the different risk assessment levels can help you further.

Below are some of the tiers or risk exposures that are dependent on the market capitalizations of cryptocurrencies.

1. High-Risk

As the name signifies, this risk exposure is higher and as cryptocurrencies are volatile assets, you might end up getting liquidated faster than you thought with this class of cryptocurrencies.

Cryptocurrencies that fall into this high-risk assessment are mostly coins with very large circulating supply, such as meme coins like doge, Shiba, Babydoge, etc., and projects with no visible utilities.

Some high-risk investors best described them as “gems” and depending on the circulating supplies, one can make considerable profits over a short period because they are always very low priced and traders can acquire so much. They are also highly volatile and can pump so much as well as dump so much.

2. Medium-Risk

This type of market capitalization gives investors a certain level of confidence to buy or invest in cryptocurrencies. Unlike the large market-cap cryptos that run into tens of billions of dollars, the medium-risk cryptocurrencies are in the ranges of a billion to ten billion dollars as previously stated.

3. Low-Risk

If you are just starting out with cryptocurrency investment or looking for lower-risk exposures, it is best to go for low-risk coins. These are cryptocurrencies with large market capitalizations with a circulating supply of more than $10 billion. Cryptocurrencies such as BTC, Eth and BNB fall under this category.

They are a low risk not just because of the number of years they have been in use but also because of the concepts behind them, which, in turn, fuels their adoption.

Related: How Can Cryptocurrency and Blockchain Technology Revolutionize Business?

The Relevance of Market Capitalization in Cryptocurrencies

The analysis of cryptocurrencies’ market capitalization to get the current valuation is one way to look at it. If you are looking to invest in any coin, you must go beyond that.

No doubt, the market cap can influence your investment decision in many ways, including:

Growth Potential

As a general rule of thumb, the higher the market cap of a coin, the higher the chances of further growth. For example, when the price of Bitcoin was $20,000 per coin, people still invested because the market cap was high.

Thus, the cryptocurrencies with a higher market capitalization tend to have room for more growth and as these coins’ developers come up with new utilities, the adoptions would be massive.

Trend Analysis

Some cryptocurrency enthusiasts prefer trading to investing. Depending on your trading strategy, you can use the market cap of coins to discover the trends.

For example, when the Play-to-Earn (P2E) era was in vogue, we saw a shift in trend to other P2E coins with Axie Infinity’s AXS leading the pack. Then came the metaverse with Decentraland (MANA) and Sandbox (SAND) leading and had Fortune 500 companies acquiring lands on the metaverse. Therefore, when the trend is about to change, you will see the coins that would fuel that trend picking up the bullish race with an astronomical rise in market capitalizations.

Final Thoughts

Using market capitalization, you can discover trends, evaluate risks and make better investment decisions in cryptocurrencies. Yet, you must not overly depend on the market cap because cryptocurrencies are volatile and susceptible to manipulations. Doing due diligence and managing your risk exposure is a better way to invest.