What is a market cap in cryptocurrency?

Market capitalization, or simply market cap, is the term used to describe the overall value of a company or cryptocurrency. It can be useful for a number of different things, from comparing the size of multiple entities, to predicting how a particular asset might perform in the future. If you’re a trader or investor, understanding market cap is critical.

In this AAG Academy guide, we’ll explain what a market cap is in more detail, and look at why it’s important, how it’s calculated, and what you can do with it. We’ll also cover the different market cap classifications in use today.

What is a market cap?

Market cap, which is short for market capitalization, is the total value of a company or organization. It is calculated by multiplying the total number of outstanding shares of a company’s stock by the current share price. In the case of a cryptocurrency project like Bitcoin, we instead multiply the total number of coins or tokens in circulation by the current token price.

For example, we can calculate the current market cap of Ethereum by taking the total number of ETH tokens (over 120.45 million) and multiplying that by the current price, as of March 23, 2023, for a single ETH ($1,760.50). This gives us a total of $212.79 billion, which confirms Ethereum is still the second-most valuable cryptocurrency in the world behind Bitcoin.

Market capitalization is therefore, as its name suggests, determined by the market, and it constantly fluctuates as a result of that. We don’t tend to see large fluctuations for public companies — at least not on a frequent basis — but they are common for cryptocurrencies, which are renowned for being much more volatile.

Why is a market cap important?

Market capitalization is important because it tells us how valuable an entity is at any given time. What’s more, we can track and compare market cap over time, which gives us an indication of market performance — and how the value of a company or cryptocurrency has changed. This is a great measurement of how stable a particular asset is.

Let’s compare two different assets to demonstrate this. The Coca-Cola Company, which currently has a market cap of $259.79 billion, is trading at $60.05 per share today. Six months ago, its share price was $58.60. Although there have been small fluctuations during that time, we can see that the Coca-Cola Company is a relatively stable stock.

In comparison, the price of a single Bitcoin (BTC) is currently $27,750.80. Six months ago, its price was $19,286. That’s a substantial difference in a relatively short space of time, and if we look at how Bitcoin’s price moved during that period, we see much more significant fluctuations. It’s a similar story for Ethereum and other large cryptocurrencies.

Market cap also tells us how an entity is performing. We can see from the examples above that both Coca-Cola and Ethereum are performing better than they were six months ago. Using a larger time scale would tell us how they’ve performed throughout the last year, or even longer.

What can you do with a market cap?

Investors use the market capitalization of a company or cryptocurrency project to determine its position. As we’ve outlined above, it is an excellent indicator of how an entity is performing and how it has been performing in the past. It can even help us predict performance in the future. This kind of information is critical from an investor’s point of view.

Market capitalization also enables us to quickly compare multiple companies or cryptocurrency projects. This is useful for a number of reasons: It not only tells us immediately which is the largest in terms of market value, but it can also indicate which is likely to be more stable. An entity with a larger market cap is typically able to withstand headwinds and other impacts better.

For example, if a financial event of some kind had a significantly negative effect on the cryptocurrency market as a whole, the likes of Bitcoin and Ethereum are more than big enough to cope with that. However, much smaller cryptocurrency projects, which are relying on strong investment to keep operating, could be more severely impacted and may not survive it.

How can you use a market cap in cryptocurrency?

Another important factor to take into consideration when comparing the market cap of cryptocurrencies is that larger, more valuable projects almost always have higher liquidity, and are therefore less impacted by significant selloffs. According to Bank of America, you would need an investment of at least $93 million to move Bitcoin’s value by just 1%.

However, with less valuable cryptocurrencies, or less valuable companies, an investor cashing out as little as a few thousand dollars could have a big impact on the overall value of the project. This in turn can put fear into other investors, who also cash out, and before long, the project’s value has fallen sharply, and any coins or tokens you hold will be worth a lot less than.

This doesn’t mean that you should only invest in cryptocurrencies with huge market caps. As is always the case with investing, the greater the risk, the greater the potential reward. We’ve explained how larger dips in market value can be a bad thing, but on the flip side of that, smaller, more volatile entities can also see larger peaks, which can be incredibly lucrative.

What are the different market cap classifications?

There are three key categories of market capitalization, which are:

• Large-cap:
  Companies with a market value of more than $10 billion. These are considered to be lower risk investments because they are more established and are usually better equipped to handle market movements.

• Mid-cap:
  Companies with a market value between $1 billion and $10 billion. These are higher risk investments, but they may have greater potential for movement.

• Small-cap:
  Companies with a market value less than $1 billion. These are considered to be higher risk investments that are likely to be more impacted by market movements, and are therefore more volatile.

Some investors and analysts also use the mega-cap and micro-cap classifications. These are companies with a value of more than $200 billion and less than $250 million, respectively.

References

• What is market cap
• What is market cap and why it matters
• Bank of america claims it costs just 93 million to move bitcoin’s price by 1
• Market cap explained