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Crypto Market Capitalization Explained

BitForex Editor
Dec 18, 2020

The concept of crypto market capitalization is based on a mathematical technique used to determine the value of a cryptocurrency. It is the easiest and straightforward means of knowing how significant or valuable a digital currency is, plus it can also help you make smarter investment decisions. Market capitalization can also be referred to as the multiplication of the current share price by the total number of existing shares. In terms of cryptocurrency, it is the current price of a coin multiplied by the total number of coins available in the market, often referenced as the circulating supply.

Stock markets make use of the Market capitalization of companies to carry out informed investment decisions. CoinMarketCap was one of the first to popularize ranking crypto assets based on a coin's market cap. An example of how a market cap works can be better explained using an example. Let's assume that an altcoin is presently valued at 100 dollars with a circulating supply of 25 million. By multiplying both, one can easily determine the crypto market cap, which is 2.5 billion dollars in this case.

Though the use of Market capitalization offers basic ideas and knowledge about the performance and size of a cryptocurrency or company, it is essential to understand that it is not the same as money inflow; this means that it does not identify how much money is in this market. This is a common misunderstanding because the market cap calculation relies directly on the price, but in the actual sense, a small difference in price is capable of affecting the market capitalization significantly.

Based on the early example, a small number of dollars could potentially increase the cryptocurrency from 100 dollars to 150 dollars, which could also affect the market cap and cause it to increase from 2.5 billion dollars to over 3.7 billion dollars, however it should be understood that this doesn’t suggest that there was a movement of 3,7 billion input into the market. In the real sense, the money required to bring about a spike in price depends on liquidity and volume, which are separate but related concepts.

While volume is based on the number of assets exchanged within a specific period, liquidity, on the other hand, refers to the degree to which a capital can be sold or purchased with minimal impact on the price. In context, a liquid and high-volume market cannot be manipulated easily as there are numerous orders in the order book as well as a significant volume of orders in various price ranges. This could bring about a less volatile market, which means that a whale would require a lot of money to manipulate the price significantly.

Total Market Capitalization

Total market cap refers to the market data from various cryptocurrencies such as Bitcoin, Ethereum, EOS, amongst others, in other to offer a better and real-time picture of how assets in the crypto sector are performing. Another essential metric to look out for, especially with altcoins. There is a limit to the circulating supply of cryptocurrencies like Bitcoin, which means that no more than a 21million coins will ever be in existence.

Coins that usually have a larger total supply are often priced much less expensively. When analyzing the various cryptocurrencies in the world, it is necessary to depend on the** market capitalization** other than coin price. It might be tempting to assume Bitcoin cash is better or more beneficial than XRP, but in the real sense, Bitcoin cash has a crypto market capitalization that's a third smaller.

Circulating supply, which considers the total amount of coins that are available to the public, is not the only method for calculating the market capitalization of a cryptocurrency. There are other alternatives, which include; calculating the total supply, which is done by considering assets that might be reserved or locked up. Maximum supply is also another alternative where you can calculate market capitalization by multiplying the price of an altcoin by the total number of coins that could ever exist. This method might prove difficult as a higher circulating supply can most likely affect the price of cryptocurrencies.

Market Manipulation In Crypto Market Capitalization

Another significant area of cryptocurrency market capitalization to take note of is based on market manipulation. Small market cap over large caps tends to lend themselves to price manipulation more easily. Bad actors take advantage of small market cap coins by having control over a large amount of the total supply in other to create the movement of large prices in one direction or another.

Also, an essential factor to note is that the crypto market cap doesn't offer any information as regards the future direction that a certain cryptocurrency will take. No aspect of the equation determines the future coin supply.

Is Crypto Market Capitalization An Important Metric?

There is a lot of argument based on the amount of weight that should be put on the size of the cryptocurrency market. Some critics are of the opinion that it is an unwelcome legacy from the stock market, which would most likely result in misguided investment decisions as well as contributing to a high level of greed and fear

In context, crypto market capitalization provides fact-based insights into how altcoins are performing, which is a vital source of objectivity as opposed to social media. Market capitalization, in the long run, allows you to go about making informed investment decisions based on crypto assets in real-time, especially in present times when blockchain technology and digital currencies continue to gain momentum.

Generally, the market cap is an essential and all-around useful metric that allows you to see how valuable a cryptocurrency is; however, there are still certain factors that you must take note of. If you are seeking to invest in any cryptocurrency, then you should understand that market cap is one of the numerous tools out there, which is why you should properly research the projects you have an interest in so as to get a better understanding of their growth potential because, in the actual sense, the market cap can only get you so far.

About BitForex:

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BitForex is programmed in a way that it can quickly adapt to the changes of the Crypto market while introducing new features like margin trading, enhanced trading charts,  derivatives, and a host of others. The headquarter of BitForex is located in Hong Kong, while there are branch offices in countries like the United States, South Korea, and Singapore.

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