The market capitalization of cryptocurrencies
Content
Financial industry participants meet market capitalization of assets daily. Newbies, in turn, see in the market cap just the amount next to the crypto ticker, and professionals know how this amount reacts to events and skillfully uses their analysis skills to achieve success. We invite you to become the second category of players and study such an indicator as market capitalization in detail.
It should be noted right away that the capitalization of a specific token/coin indicates the value of all project assets. And the total market cap is used to determine the value of all cryptocurrencies in the industry.
When building your trading strategy, you need to compare the market capitalization of those projects that will potentially end up in your portfolio and exclude the “weak link” that will pull you to the bottom.
Determining the market cap and the project capitalizations is a matter of minutes. Just use the popular CoinMarketCap service. But how to use these amounts in drawing up your strategy, and why do you need a market cap in general? This is what we’ll discuss in this article.
Theoretical part
Market capitalization is a measure of the total value of all cryptocurrencies. It can be determined by multiplying the number of tokens/coins in circulation by the price of the corresponding asset.
Let’s take a look at the market cap calculating using the example of Coin A and Coin B. The total supply of Coin A is 1,000 coins, and all of them are already in circulation. Coin B has 60,000 coins in circulation, while its total supply is 100,000. Coin A is trading in the market at $100, and Coin B’s price is $2.
Now we can calculate the indicator using the formula:
Market Cap = Supply × Price
Thus, we get:
Coin A cap = 1,000 × $100 = $100,000
Coin B cap = 60,000 × $2 = $120,000
As it turned out, Coin B outperforms Coin A in terms of market capitalization, although its value is 50 times lower. Therefore, it’s worth concluding that this indicator better reflects the value of the entire network than just the asset rate.
In turn, the total crypto market cap demonstrates the value of all assets, including both popular coins (BTC, ETH) and small tokens.
Of course, this indicator is not stable due to the high volatility of the cryptocurrency market. It’s interesting to note that until 2017, the total market capitalization reached only $20 billion, and now it’s at $1,7 trillion!
Practical use of crypto capitalization
Basically, the crypto market cap indicator is often a component of the comparative analysis of the digital asset industry with the financial sectors. The stock or gold markets are especially popular in comparison to the crypto industry. This approach helps to make a rough forecast about the future behavior of the crypto market.
At the same time, the amount indicated as the total capitalization may not be entirely reliable since it is based on the cost of each project in the industry and its emission of coins.
The market capitalization of some tokens is manipulated by their developers to create a false reputation as a worthy project and attract investors.
Let’s look at several scenarios for using a market cap in order to understand its importance to the trader.
Scenario 1
A certain low-cost cryptocurrency has appeared in the industry, and a small number of coins are in circulation — up to 1000. Applying the formula that we wrote about above, we find out that the capitalization of this asset is $10 thousand. Thus, a trader who owns even half of the coins has the opportunity to influence this crypto. Thus, we can observe the manipulation of the asset, which is easy to recognize by examining the charts.
Scenario 2
There is a popular cryptocurrency on the market that has been in circulation for a long time, but you can buy it, for example, only for $1. At the same time, there are 1 million coins in circulation, and its total capitalization, thus, is $1 million. In this scenario, manipulation of the asset’s value by third parties is almost impossible since even with 1000 coins, the investor will not have a significant impact on this asset. And to buy back more than 500 thousand coins — the situation is almost unreal.
Scenario 3
Let’s consider the most stable scenario in which we have a global network, which many participants actively use, acquiring an asset at a high price. In this example, both manipulations of an individual network participant and a sharp collapse are completely excluded.
Summing up these scenarios, we can conclude about the important role of cryptocurrency capitalization. This indicator is clear proof of the reliability and stability of the asset, guarantees demand for it among the crypto community.
However, keep in mind the fact that there are other indicators to consider. Market capitalization is just a small part of a huge system that many seek to conquer.
