What is market cap and how does it affect the price of cryptocurrency?
What is market cap?
The Market Cap or market capitalization represents the total monetary sum invested in a particular asset.
Market Cap is to be taken into consideration during a fundamental analysis before a possible investment in a crypto-currency. The concept is similar in stock, forex, and cryptocurrency as well. However, we will define and interpret the market cap relating to cryptocurrency in this article.
How to calculate the Market Cap?
The market capitalization of a particular crypto coin is calculated by multiplying the circulating supply by the price of the coin. For example: at the time of writing this article, we know that about 19 million Bitcoins are in circulation and the market price is $41,351. To calculate the market capitalization of Bitcoin, we need to do the following operation:
18,933,737 x 41,351 = 782,928,958,687 (Circulating supply x price = Market Cap)
Bitcoin, therefore, has a market cap of $782 billion at the time of writing. This figure represents the total value of money invested in this cryptocurrency at the moment as the Market Cap is constantly changing.
How does the Market Cap work?
The Market Cap is constantly fluctuating depending on the price but also depending on the supply in circulation. The price of the currency adjusts to the strength of the buying and selling pressure on the trading platforms for all cryptocurrencies. There are three types of supply we will discuss below, but circulating supply is important factor among them for the calculation of market capitalization.
Circulating supply refers to the amount of currency that is immediately available. It is used to calculate the current market cap.
Total supply defines the quantity of money that has been created. This created currency is not necessarily in circulation because its distribution depends on the monetary model of the cryptocurrency.
The maximum supply represents the amount of money that can be created during the existence of the cryptocurrency. It is useful for calculating the fully diluted market cap, allowing to predict the capitalization in the future, if all the currency was in circulation.
How important is the market cap or market capitalization of cryptocurrency?
Market capitalization measures an asset’s open market value as well as the market’s perception of its future prospects. It helps investors while building their prortfolio. Understaing of market capitalization helps investors to reduce the investment risk by diversification of investment in variety of different market caps ( small caps, medium caps, and large cap assets ).
Now, let’s understand the concept by this way. As we know the market cap of overall crypto-currency is approximately $1.72 trillion today. This figure may seem very important to you but, if we look to compare it to the total market capitalization of another asset like gold, we realize that the difference can be significant since the total market capitalization of gold amounts to a really impressive number close to $11 trillion.
The most interesting thing when analyzing the market cap of cryptocurrency is to take note and analyze the evolution of this market capitalization over time. Indeed, we have seen a very rapid growth of capitalization. This is the reason why bitcoin is now often compared to gold and often called by investors “digital gold”. Therefore, it is believed that there is even more growth potential for this value in the years to come.
As a key statistic, the Market cap might show a cryptocurrency’s future potential and whether it is safe to buy in comparison to other crypto assets.
Where and how to find relevant information about the market cap?
In this article, we offer you some tips to learn more about the resources where you can find out the market cap, trading volume, circulating supply, and other significant details about the specific coin/token.
Despite the above resources, you can find more information about a cryptocurrency and its market capitalization by visiting the official website of the particular cryptocurrency and read the whitepaper of that currency which is the original text explaining its principles and more entire details.
Final thoughts
Market cap is a useful factor when comparing the total value of cryptocurrencies. Moreover, market trends, use cases, stability of coins, and your financial condition need to be considered while making a fundamental analysis of a coin before investment.
