As of writing, the global cryptocurrency market capitalization is $1.7 trillion, swelling from 2022’s $871 billion. Bitcoin, the most popular among thousands of digital currencies, has a current market cap of $863 billion and an impressive 50 percent share of all the crypto in circulation today.
These are all huge numbers — but what does crypto market cap mean in the first place? Keep reading to find out.
What is a crypto market cap?
Cryptocurrency market capitalization refers to the total value of a specific asset or the entire market. When computing a specific crypto market cap, the formula is Current Price of Asset x Total Number of Assets in Circulation.
For instance, if Bitcoin’s current price is $44,082.70 and the circulating supply is 19,577,093. Then, we get a market cap of about $863 billion.
Note that this figure involves the total number of assets circulating in the market. This is different from the asset’s total supply. In the crypto world, some coins or tokens are not available for trade. For instance, they might not have been released yet. Or they could be locked or reserved.
The crypto market cap hinges on several factors. These include coin or token value, market trends and overall changes in sentiment. All of these could lead to upward or downward fluctuations.
Why is the crypto market cap important?
The good thing about the crypto market cap is that it offers people an objective insight into an asset’s performance. Think of the market cap of crypto as a snapshot of a specific asset’s stability. People view an asset as more established and stable when it has a larger market cap. On the other hand, smaller caps signal higher risk and potential reward.
In crypto, assets are typically categorized into three based on their market caps.
- Large-cap. Cryptocurrencies with a market cap exceeding $10 billion. Prime examples include Bitcoin, Ethereum and USD coins.
- Middle-cap. Cryptocurrencies with a market cap ranging between $1 billion and $10 billion. Some of the popular middle caps include Dogecoin and Cardano.
- Small-cap. Cryptocurrencies with a market cap below $1 billion. Immutable X and Axie Infinity are some examples.
Read: Blockchain digital assets transforming investments
Crypto market cap benefits
The crypto market cap is an important metric that helps traders and investors in many ways. Here are some.
1. It helps in assessing risk
Generally, cryptocurrencies with substantial market caps are viewed as less risky. They primarily cater to those who have more conservative investment strategies. Many beginners stick to these major assets because they are more stable. Conversely, smaller market cap coins may exhibit higher volatility. But while they present greater risks, they offer potentially more significant returns. People with a higher risk appetite are more comfortable dealing with such assets.
2. It indicates liquidity
For many investors, liquidity is a high priority. With enhanced liquidity, they can enjoy a more efficient trading experience and execute transactions without hassle and notable price differences. In crypto, digital currencies with higher market caps offer superior liquidity.
3. It’s a vital trend analysis tool
Buying and selling crypto entails a lot of monitoring. And one of the most essential metrics to watch out for is the crypto metric cap. Generally, a rising market cap signifies a bullish market sentiment. This is marked by increased investor optimism and heightened buying activities. On the other hand, a declining market cap indicates a bearish trend. In this scenario, investors potentially withhold or divest their crypto portfolio.
Disadvantages of solely relying on crypto market cap
Here’s a caveat: Crypto market shouldn’t be the sole basis for investment decisions. These are the drawbacks to consider.
1. It doesn’t capture the whole picture
Cryptocurrency prices and their respective market caps are known for their swift and unpredictable movements. Hence, depending solely on market cap as a decision-making driver isn’t wise. Investors must look into other crucial factors, such as adoption rate, use case, security and the underlying technology or solutions that the cryptocurrency developers provide.
2. It’s susceptible to price manipulation
Cryptocurrency assets with lower market caps are more susceptible to price manipulation. Since they have limited liquidity, bad actors can exert external influence to manipulate this market segment. One popular method is the pump-and-dump scheme. This tactic artificially inflates the value of an asset by disseminating fraudulent endorsements and exaggerated statements, impacting market sentiment.
Final thoughts
The crypto market cap is a vital metric that depicts the total valuation of a specific cryptocurrency or the entire cryptocurrency market at a given point in time. Investors and traders use it to monitor trends, assess an asset’s stability and liquidity and make decisions. Nonetheless, solely relying on it has its share of drawbacks. A sound strategy entails looking into different factors to gain a more comprehensive understanding of a cryptocurrency’s potential and risks.
Disclaimer: This article offers general information. It’s not legal or financial advice. When making decisions, factor in legal implications and individual circumstances and consider consulting qualified professionals.
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