Can it solely paint a picture of the overall health of a cryptocurrency?
The value of a crypto coin or token is not measured by price alone. There are a number of metrics used to understand the value of a digital asset. One of them is Market capitalization, or commonly termed as market cap, an original stock market buzzword with the equation:
Total number of shares x current price = company stock market cap
For cryptos, market cap indicates the size and market value of a cryptocurrency using the equation:
Current market price x circulating supply = crypto market cap (circulating supply is the total number of coins in the market)
$10,926.64 (Bitcoin price) x 17,300,000 (circulating supply) = $189,030,872,000 (market cap)
The result of the equation will give you a picture of the value of a cryptocurrency in comparison with other cryptos. It is important to consider the market cap when measuring the total value of a cryptocurrency aside from its price before making an informed investment decision.
Now, three metrics are used in calculating the market cap for cryptocurrencies: circulating supply, total supply, and max supply.
Circulating supply is the most basic metric wherein these are the coins or tokens circulating in the market and made available to consumers.
Total supply is the total number of tokens in existence, which can include those that are locked, reserved, or not sold in the market.
Max supply is the total number of coins that will ever be created throughout the cryptocurrency’s entire lifespan.
Circulating supply is widely considered to give the most accurate measure since it only counts what is in active circulation.
It is a common error to read that a coin’s market cap is the reflection of the total amount of fiat currency being invested in it. It is a false reading, and the following cites the reasons why:
1.If the total number of coins is 10,000,000, and somebody buys one coin priced at $1, the total market cap is still $10,000,000.
2.The price of $1 will increase once there is demand, and the coin is bought more aggressively. It means the price bidding will push the price up, thereby increasing the value of other owners’ coins. The result is a larger market cap.
3.Inversely, when the 10-billion dollar market cap is achieved, and people start to sell their coins, the sell off will drive the price down, with the possibility of even less than $1 per coin.
This only goes to show that the total market cap is hugely different from the total fiat investment.
In 2009, for example, Bitcoin’s market cap was 300 billion dollars compared to the total amount invested, which was 6 billion dollars. It meant that the market cap increased by $50 for every dollar of Bitcoin investment.
The Importance of Market Cap
Since crypto developers don’t publish financial statements as stock market counterparts do, all the more market caps become important to fast-check how valuable coins are. The volatility of a coin is revealed depending on the largeness or smallness of its market cap. Coins with small market caps can take a beating every single time there is an affective headline market news. The market movement of large traders, called whales, contribute to the high volatility of the crypto market as a whole. But those with large market caps such as Bitcoin, Ethereum, and Ripple will not easily be swayed and manipulated.
It should be noted, however, that as market caps are the cumulative amount of the coin price and its circulating supply, it does not reflect who owns how many for how much to have the influence to sway the market price just to project the robustness of its market health. It can be misleading and a dangerous way to solely base your investing judgment on. You can make a quick look at a coin by its market cap then weigh your options together with other significant metrics before deciding.
One hint to calculate market capitalization is to consider the total coin supply then add the inflation factor metric to your evaluation chart. This way, you can get a clearer picture of the future valuation of your crypto asset of choice.
Just do not compare your crypto asset with other crypto assets. Each coin is uniquely designed for different users, segments, and purposes. To compare their market caps is an exercise in futility.