Market capitalization as a term has also entered cryptocurrency investing conversations over time. Its definition and application in cryptocurrencies are not exactly the same as in the traditional stock market. Cryptocurrency market cap is broadly defined as a metric that measures the total value of a particular cryptocurrency in the current market.
The market cap of a cryptocurrency is determined by dividing the total coins that have ever been mined by the price of one coin at a particular time. Market capitalization can be used as a valid measure of how stable an asset is likely to be.
This feature provides a brief introduction to cryptocurrency market capitalization, why it’s important to understand, and what it means for investors.
What is cryptocurrency market cap and how does it work?
Since the inception of Bitcoin, the first cryptocurrency, more and more cryptocurrency projects have entered the scene, each promising a different benefit or use to investors. Some altcoins boast unmatched transaction speeds, while others claim to offer the lowest fees.
Other coins, such as the privacy-focused altcoin Monero (XMR), offer airtight security and complete privacy. XMR transactions made through a specially encrypted Monero wallet are said to be completely anonymous and untraceable, making Monero an ideal coin for users with extreme cybersecurity concerns.
There are currently thousands of active cryptocurrency projects available for traders to invest in. Naturally, each of these coins will be valued differently in the market, and this is what cryptocurrency market capitalization is meant to measure.
The market capitalization of a particular coin is meant to give investors an idea of ??how big the project currently is and how well it is doing.
The market capitalization of a cryptocurrency is calculated by multiplying the current market price of the coin by the total circulating supply. For example, if a certain coin is trading at $5 per unit and there are approximately 10,000,000 coins in circulation, its market cap would be $50,000,000.
Many cryptocurrency experts consider market capitalization to be the most important factor in determining a cryptocurrency’s viability as an asset. There are now a number of websites and online indexes that calculate and track market capitalization for various cryptocurrencies, as well as other important financial metrics. These sites allow crypto investors to track the dominance and popularity of their chosen coins.
Why does market capitalization matter?
The market capitalization of a crypto project can provide valuable insight into the relevance of that project, especially for investors looking to gauge the popularity of a particular coin over the long term.
For example, most cryptocurrency experts will agree that coins with large capitalizations above $10 billion are relatively safe investments. Investing primarily in such coins is usually considered a conservative strategy, as these cryptocurrencies are likely to be less unpredictable investments than other coins.
However, it is worth noting that even the most stable cryptocurrencies will still be more volatile in terms of their value than traditional investment products such as stocks or bonds.
Mid-cap cryptocurrencies are those with a market capitalization between $1 billion and $10 billion. Unlike large-cap cryptocurrencies, these cryptocurrencies are typically much more volatile, but may have more upside potential. Meanwhile, small-cap cryptocurrencies are those with a market capitalization of less than $1 billion. They are often subject to extreme price volatility, with their value often rising or falling significantly within hours.
Thus, small-cap cryptocurrencies are considered the riskiest investments one can make in cryptocurrencies, even though their growth potential is expected to be good in the short term.
How can market capitalization affect your investment strategy?
One viable way investors can apply their knowledge of market capitalization is by following a market capitalization weighted investment strategy. Under this strategy, the amounts that traders invest in their chosen cryptocurrencies are proportional to the current market capitalization of those coins.
To illustrate, this means that an investor looking to put $100 into total crypto investments should allocate the largest portion of that amount to coins with the largest market capitalization and smaller portions to other less popular cryptocurrencies.
However, it is important for novice crypto investors to keep in mind that the market is prone to dramatic price swings, even for large-cap coins. Therefore, the market capitalization of even the biggest and most popular coins is constantly changing. Since cryptocurrency is a relatively new asset compared to traditional assets such as stocks, there are currently few ways to predict how a particular coin’s value or growth trajectory is likely to change over time.
The unpredictability of cryptocurrencies is the main reason why financial experts encourage new traders to invest cautiously even in large crypto projects. It is always a good idea for novice investors to do their due diligence before committing to any investment and only put in as much money as they can afford to lose.