Market capitalization – or “market cap” for short – is a crucial part of the investment world, especially in cryptocurrency markets. Before putting their money into a cryptocurrency, most traders start by checking out the coin or token’s market cap. The metric can then tell you if it’s worth buying, selling, or even HODL at that specific point in time.
So, now that we know it’s important. Let’s explain what it is, how to calculate market cap, and the different types of capitalizations.
What is Market Cap Crypto?
Market capitalization, commonly referred to as a market cap, is a metric that measures the relative size of a cryptocurrency. In general, the higher the market cap of a cryptocurrency, the more dominant it is considered to be in the market. For this reason, market cap is often regarded as the single most important indicator for ranking cryptocurrencies.
How To Calculate Market Cap Crypto
So, now that you know what a market cap is, here’s how to calculate it:\.
Cryptocurrency market cap = circulating supply x unit price
where:
Circulating supply: total number of coins available for trade in the open market
Unit price: the price at which one unit of the asset is sold
As the equation shows you, an asset’s market cap is calculated by multiplying the circulating supply with the current token or coin price.
Taking Bitcoin (BTC) as an example, the circulating supply of Bitcoin is approximately 19 million BTC and its price per unit is hovering around 27,000 USD on May 12, 2022. Therefore, we can calculate the market cap of Bitcoin by multiplying 19 million and 27,000. This then tells us that the Bitcoin market cap is 513 billion.
However, if you prefer a hassle-free way, you can also visit an online market cap calculator. One of the most popular ones is CoinMarketCap, which shows the market capitalization values of the cryptocurrencies in real-time, every day for 24 hours.
Importance of Market Cap Crypto
Price is just one way to measure a cryptocurrency’s value. Investors use market cap to tell a more complete story and compare value across cryptocurrencies. As a key statistic, it can indicate the growth potential of a cryptocurrency and whETHer it is safe to buy, compared to others. Still, do note that many cryptocurrencies’ market cap can swing dramatically due to their volatility.
To demonstrate, let’s compare the market cap of two fictional cryptocurrencies.
- If Cryptocurrency A has 400,000 coins in circulation and each coin is worth $1, its market cap is $400,000.
- If Cryptocurrency B has 100,000 coins in circulation and each coin is worth $2, its market cap is $200,000.
Even though the individual coin price of Cryptocurrency B is higher than Cryptocurrency A, Cryptocurrency A’s overall value is double Cryptocurrency B’s.
A primary way to think about market cap is as a rough gauge for how stable an asset is likely to be. (It’s important to note that even Bitcoin, crypto’s biggest market cap, still sees volatility.) But the same way a bigger ship can safely navigate heavy weather, a cryptocurrency with a much larger market cap is more likely to be a more stable investment than one with a much smaller market cap. Conversely, digital currencies with smaller market caps are more susceptible to the whims of the market – and can see huge gains or dramatic losses in their wake.
Classification of Crypto Assets Based on Market Cap
There are four categories used in market capitalization to classify the value level of various assets on the cryptocurrency market. These classifications will make it easier for you to compare the total value of cryptocurrency with others, so you will be able to make better decisions for investment. Plus, this info will make reading a cryptocurrency chart a little easier.
Here are the four market capitalization classifications in cryptocurrency:
Large-cap
Large-cap cryptocurrencies refer to cryptocurrencies with huge market capitalizations and are commonly considered to be safe crypto investments. A cryptocurrency is considered a large-cap if its market cap is over 10 billion USD.
Besides that, large-cap cryptocurrencies also have higher liquidity, which attracts more investors than those with lower capitalizations. This means that you can find these assets almost in every digital asset trading platform.
Cryptocurrencies included in this category are Bitcoin and ETHereum (ETH).
Mid-cap
Mid-cap cryptocurrencies have a market capitalization of 1-10 billion USD. Currencies categorized as mid-cap are generally considered to have untapped profit potential but are higher-risk assets.
In general, mid-cap cryptocurrencies tend to show good performance in the long term. By having it in your portfolio, mid-cap currencies can increase your asset diversification. However, not all mid-cap coins have the potential to turn into large-cap assets.
Examples of currencies belonging to the mid-cap category include Polygon, Avalanche, and Uniswap.
Small-cap
Coins and tokens belonging to the small-cap cryptocurrencies are currencies with a market cap of around 100 million – 1 billion USD. Cryptocurrencies in this category are very volatile and considered high-risk investments, even though they have the potential to grow in the short term.
An example of the currencies in this category is THORChain.
Micro-cap
Micro-cap assets are considered to have higher risks compared to the currencies in the small-cap category. Generally, currencies belonging to this category are new coins launched by a group of people or anonymous groups with a market cap of less than 50 million USD.
Closing Thoughts
Now that you know how to calculate market cap of any cryptocurrency, do note that while the market cap is indeed an important figure, it likely isn’t a sufficient metric alone to make the right investment decisions. You should combine the data with other insights and metrics to analyze where the project and overall crypto market is heading.
Nevertheless, if other metrics strongly suggest that an asset is worth investing in, an increasing market cap can be a sufficient signal to back your decision.
