Accessing the market cap aids in determining the size and popularity of a crypto asset, making it easier for the trader to make an informed decision. A considerable market cap portrays the asset as reliable and trustworthy.
In contrast, having a low market cap means crypto traders and investors will see the asset as speculative and less reliable to invest in. Let’s read more about the crypto market cap, why it matters, and review crypto classifications based on these market caps.
What Is the Crypto Market Cap?
It’s a metric that shows the current value of crypto on the market. The current price is multiplied by the circulating supply to calculate the market cap. For example, if there are 15000 crypto coins in circulation, each worth $1000, the coin’s market cap will be $15,000,000.
Although many believe the current price of the crypto asset determines its worth, the market cap shows an asset’s growth and makes it easier to compare the stats with other assets.
Here’s another example for clarification. Let’s say you want to compare cryptocurrency A with a circulating supply of 70,000 coins and a current price of $3 with cryptocurrency B valued at $5 and a circulating supply of 80,000 coins.
The market cap of crypto asset B will be $400,000, whereas the market cap for A will be $210,000. Although coin B is valued more than A, its market cap is still low, meaning the investors will prefer investing in coin B, which has nearly double the market cap.
The Necessity of Accessing Market Cap
The market cap provides crucial insights into crypto markets and is an easier way to compare an asset’s dominance. Crypto coins or other assets with a massive market cap can attract more investors, making them an appealing pick over their competitors.
As a more precise metric than the asset’s price, the market cap ranks crypto and determines its position in the market. It becomes easier to identify market trends and patterns using the market cap metric.
What Factors Influence It
The price and supply of a crypto asset are the two main factors affecting the market cap. Let’s review them in detail for better understanding.
The Price of the Crypto Asset
Increasing the cryptocurrency’s price will eventually result in a large market cap. For example, if coin A has a circulating supply of only 5000 coins and each coin is valued at $20,000, the market cap will be $100,000,000.
In contrast, if another cryptocurrency B has 20,000 coins in circulation, but the price of each coin is worth $1000, the market cap will be $20,000,000, significantly lower than the cap of cryptocurrency A. Reliable currencies like Bitcoin have a higher price with a low supply.
Several meme coins like Dogecoin have massive supplies but a low value. Fortunately, investing in reliable currencies like Bitcoin is not limited by your investment. A buyer can purchase 1/1000th of a crypto coin if he doesn’t have the investment capital to purchase a coin.
Supply of the Crypto Asset
The number of coins globally circulating can influence the market price, eventually affecting the market cap. Stable currencies like Bitcoin have a limit on the number of coins that can be mined. The global circulating volume of Bitcoin cannot exceed 21 million.
The coin’s creator, Satoshi Nakamoto, has built a code into the currency’s protocol: whenever the mined coins reach 21 million, no more bitcoins will be mined. Around 19 million Bitcoins have been mined out of the 21 million. This scarcity makes cryptocurrency valuable.
Classification According to Market Cap
Based on the market cap, cryptocurrencies can be divided into four categories.
Mega Cap
This category includes the two most reliable currencies, Bitcoin and Ethereum. The currencies in this category have massive market caps. The market cap for BTC is $470 billion, whereas ETH’s is $230 billion.
Large Cap
Crypto assets in this category have a market cap of $10 billion and are considered low-risk investments. However, a higher risk or reward is also associated with the asset. Some examples are currencies like Polkadot, USD coin, XRP, and Tether.
Medium Cap
These currencies range from $1 billion to a maximum of $10 billion. As these currencies have growth potential, they carry high risk and reward. Litecoin (LTC) and Dogecoin (DOGE) are some medium-cap cryptocurrencies.
Small Cap
These currencies carry the highest risk and have a market cap of less than $1 billion. Relatively new coins fall in this category.
Although the market cap indicates the legitimacy of a cryptocurrency, it’s only one measure to consider; several other indicators and techniques are implemented to make the next move.
Is Market Cap a Feasible Way To Measure the Popularity of a Crypto Asset?
Although the market cap reflects the popularity of a crypto asset over a long period, many investors and traders don’t consider it an indicator of popularity. Nevertheless, the companies with a large market cap ($10 billion) are comparatively safer crypto investments than other cryptocurrencies with a smaller market cap.
In comparison, coins with a large market cap will be less volatile than many other cryptocurrencies but will have more volatility when compared to stocks. Having a large market cap is always beneficial for the cryptocurrency as more people will be drawn to invest.
However, it is not always an excellent choice for investors, as sometimes coins with a relatively small market cap can show more growth than others.
In contrast, investing in companies with a small market cap will be risky but can come with great rewards if the crypto asset or the company has growth potential. Although there will be a lot of speculation driving the asset’s price, some companies thrive in these conditions and become large market-cap companies.
You might be surprised to hear that market caps can be manipulated by changing the crypto asset’s price.
This manipulation is usually done with a small market cap, low trade volume, and a circulating supply of crypto assets. With only a few thousand dollars, the market cap of such a currency can be manipulated, but the changes won’t be permanent.
Are Crypto Market Caps and Stock Market Caps the Same?
While the mathematical formula used is the same, both market caps are based on different variables. For example, in the stock market, the market cap shows the equity of a company or business. Equity shows the worth of ownership.
In the traditional stock market, the market cap is a crucial indicator of attracting more businesses and operations. In comparison, crypto assets like coins don’t represent equity as these coins don’t have any legal attachment and are treated more like currencies.
What Else To Consider
More than accessing the market cap is required. You’ll need to evaluate a few other factors before deciding on cryptocurrencies. Here are some other metrics to consider:
Trading Volume
The trading volume of a crypto asset reflects the asset’s actual worth. The higher the volume, the more realistic the value will become. Currencies with high trading volumes are also very difficult to manipulate.
Price of the Asset
The price fluctuation of low-priced coins is much higher than high-priced ones.
Circulating Supply
It’s the number of assets available for trading in the market. Likewise, knowing the max supply is also crucial to know how much of the assets are left to be mined. Evaluating these two factors is essential because it can reveal the associated risks.
For example, if a cryptocurrency has a low circulating supply and a massive max supply, the uncirculated coins can cause future market flooding and lead to a market crash.
Volatility
If a currency has a low circulating supply, price, and active trading volume, the asset will have high volatility. Likewise, a high circulating supply, high trade volumes, and a relatively higher price translate to lower volatility.
Conclusion
While an increased market cap indicates a crypto asset is reliable, trading in a market with a low market cap becomes more beneficial for investors as these assets have ample space for growth.
While the market cap does affect the crypto prices, more than using a few technical indicators is needed to do successful trading. Conducting research and evaluating the price charts is always a wiser move that can drastically improve the outcomes.
Although the market cap is a crucial indicator that lets you determine the popularity of a crypto asset, it’s not the only indicator to look for. Evaluating other market indicators like liquidity and reviewing fully diluted market caps are essential to make an informed decision.
We hope the information presented here aids you in better accessing the crypto market, making your trading and investing journey in the crypto world more effective.
