Market cap is short for Market capitalization. Simply put, the market cap of a cryptocurrency is its total market value and is usually presented as a dollar amount.
It is calculated by multiplying the current market price of the currency by the number of coins or tokens in circulation.
For example, let’s take the hypothetical cryptocurrency X with a market price of $10 (no pun intended).
Let’s also assume that 100 million X coins are currently in circulation.
That will make X a cryptocurrency with a $1 billion market capitalization.
The Origins Of The Term
Market Capitalization is a terminology, with all the differences in philosophy, the crypto community has borrowed from traditional finance.
Investopedia defines market cap as the aggregate market value of a company.
It is computed as the current market price of the company’s shares times the number of outstanding shares.
In the world of crypto, the adoption of a platform is reflected in the price appreciation of its native token or coin.
This is similar to the price appreciation of the stocks of publicly traded companies.
Hence the terminology is borrowed (not to return ever, of course) from traditional finance along with analogy in the market mechanism.
Overall Cryptocurrency Market Cap
It is the combined value of all the cryptocurrencies on the market at any point in time.
As you might already know, cryptocurrencies are highly volatile, and double-digit percentage fluctuations in prices are not unknown in the cryptocurrency market.
Since 2020, the overall crypto market cap has ranged from as low as $200 million to over $3 trillion.
Even by financial crisis standards, the crypto market has been highly volatile ever since its inception.
A day with a $300 billion movement in either direction is not unheard of.
The Message Market Cap Conveys
The market cap of a cryptocurrency indicates how highly the public thinks of the underlying blockchain platform.
With a market cap close to a trillion dollars, Bitcoin remains the uncrowned king in the crypto space.
In 2022, when UST, the stablecoin on the Terra blockchain, lost its peg, LUNA, the then native token of the platform lost all its value and came to almost $0.
That number tells a lot about a crypto platform that failed to fulfill its function.
The Overall Cryptocurrency market cap, on the other hand, indicates the investor sentiment in the crypto market.
A rising overall market cap is an indicator of an impending bull market and that the general public is generally feeling comfortable throwing their money into crypto investments.
A falling crypto market cap indicates the opposite.
It would mean that investors are losing faith in the crypto industry and are dumping their investments.
It is a signal of a potential bear market.
Based on market capitalization, cryptocurrencies are broadly classified into three categories.
- Large-cap cryptocurrencies: These are the ones that have a market cap of more than $10 billion.
- Mid-cap cryptocurrencies: Their market cap lies between $1 billion and $10 billion.
- Small-cap cryptocurrencies: They have a market cap of less than $1 billion.
Examples of Large Cap Cryptocurrencies
|$ 875.58 billion
|$ 284.28 billion
|Binance Coin (BNB)
Examples of Mid-Cap Cryptocurrencies
|Shiba Inu (SHIB)
Examples of Small-Cap Cryptocurrencies
How Market Cap Matters
Owing to the track record and comparatively lower volatility, large-cap cryptocurrencies are treated as low-risk investments.
This is again in tandem with the ways of traditional finance.
Their risk is perceived to be low since they can absorb a certain amount of change in market sentiment without a significant price drop.
Small-cap cryptocurrencies are more susceptible to market conditions and are prone to dramatic price crashes.
On the bright side, for the same reasons, they also hold more upside potential and, hence are more appealing to investors with a higher risk appetite and more focus on growth. Midcap generally strikes a balance between large caps and small caps.
As always, the content of this article is only meant for informational purposes and should not be taken as financial advice.
Investing in cryptocurrencies carries significant risk and should not be attempted without significant research.
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