Understanding cryptocurrency market cap

Understanding cryptocurrency market cap
Mirror, mirror on the wall. What is the most valuable cryptocurrency of them all? In order to answer this question, we need not look at the price of cryptocurrencies but at their market capitalization (market cap). Herewith all the relevant information so that you may have a better understanding of cryptocurrency market cap.

What is cryptocurrency market cap?

Cryptocurrency market cap is a great tool that can help you make investment decisions. It is simply defined as the current price of the coin multiplied by the total number of coins that are currently available on the market, otherwise known as the coin’s circulating supply. The market cap gives a long-term perspective.

Here is a basic formula to calculate a coin’s market cap:

Total Circulating Supply * Price of coin = Market cap

Let’s say a coin has a total circulating supply of 300 000 coins and each coin is worth $3. The coin’s market cap would then by $900 000.

How to use cryptocurrency market cap to your advantage

Market cap shows the amount of risk associated. Cryptocurrencies are categorized as small cap, mid cap and large cap.

  • Large cap coins present less risk but is generally an indication that the project has limited growth potential. At the moment, Bitcoin, Ethereum and Ripple classify as large cap coins. They are ideal as a “safe” investment with conservative growth.
  • Mid cap coins have a smaller market cap than large cap coins but can also be riskier. They have more potential for growth. These coins have a market cap of $1 billion - $10 billion.
  • Small cap coins are riskier due to the potential of the project to fail. However, small cap coins are the ones that can yield big profits if the project succeeds in its white paper goals. These are coins with a market cap below $1 billion.
Did you know that you can also break cryptocurrencies market cap down into groups such as privacy coins? Work out what each privacy coin’s market cap is, and add it together. This way you will know what the total market cap for the specific cryptocurrency group is.

Coin market caps does not provide information relevant to the future price direction of the coin. Instead it serves as an indication of where the biggest chunk of the market is currently investing in.

Bitcoin market cap vs. Altcoin market cap dominance

Often times one sees headlines about Bitcoin market cap dominance dropping or altcoin market cap dominance increasing. What does this mean? In a nutshell, if Bitcoin’s market cap dominance is dropping it means that investors may be selling Bitcoin and putting their money into altcoins. It could be due to FOMO or fundamental indicators. Investors are exiting Bitcoin.

If the altcoin market cap dominance is increasing, it means that more people are withdrawing from Bitcoin and buying altcoins. This could be an indication that altcoins are likely to outperform Bitcoin.

The opposite also applies whereby investors could be selling altcoins and buying Bitcoin. In this case, altcoin market cap dominance will decrease and the Bitcoin market cap dominance will increase.

Since the beginning of 2020, the Bitcoin market cap dominance has remained relatively stable between 62 – 70%.

In conclusion, there are a great variety of tools to assist investors. Besides market cap, other useful technical indicators include Bollinger bands and Moving Average Convergence Divergence to name but a few. Be sure to make use of them to make the best financial decisions.