Traders often use market cap as a starting point to assess the potential of a cryptocurrency before investing. This information can guide their decisions to buy, sell, or hodl.
Given its significance, it's worth understanding what market cap is, its relevance to the world of crypto, and the various types of capitalizations.
What is Market Capitalization in Crypto?
In the crypto industry, market capitalization is a metric that measures the relative size of a cryptocurrency asset or investment. It is calculated by multiplying the current market price of a coin or token by its circulating supply: Market Cap = Current Price x Circulating Supply.
Although market capitalization can offer insights into a cryptocurrency's size and performance, it does not represent market liquidity or the actual amount of money in the market. This is a common misconception because market capitalization is determined solely by price, but a relatively small price change can have a significant impact on it.
For instance, let's assume a cryptocurrency's price is $5.00 per unit, and its circulating supply is 100,000,000 coins, giving it a market capitalization of $500,000,000. A few million dollars could theoretically boost the price to $10.00, increasing its market value to $1,000,000,000.
However, this does not imply a $500,000,000 inflow into the market. The amount of money required for such a price increase depends on its volume and liquidity, which are two distinct yet interconnected factors.
Crypto Classification by Market Cap
To classify the value of assets in the cryptocurrency market, four categories of market capitalization are used. This information can help investors make better investment decisions and make it easier to read cryptocurrency charts.
The first category is large-cap cryptocurrencies, which have a high market capitalization and are generally considered to be safe investments. Large-cap cryptocurrencies have a market cap of over 10 billion USD, making them highly liquid and accessible on most digital asset trading platforms. Examples of large-cap cryptocurrencies are Bitcoin and Ethereum (ETH).
The second category is mid-cap cryptocurrencies, which have a market capitalization ranging from 1-10 billion USD. Mid-cap currencies have untapped profit potential but are considered to be higher-risk assets. While some mid-cap cryptocurrencies have the potential to become large-cap assets, not all of them do.
Small-cap cryptocurrencies are the third category, with market capitalizations ranging from around 100 million to 1 billion USD. These currencies are highly volatile and are considered to be high-risk investments. However, they also have the potential to grow in the short term.
The fourth and final category is micro-cap assets, which are new coins launched by a group of people or anonymous groups with a market cap of less than 50 million USD. These assets are considered to have the highest level of risk.
Volume and Liquidity
Volume refers to the amount of assets traded in a particular period, while liquidity indicates the ease with which an asset can be bought or sold without having a significant impact on its price.
A market with high volume and liquidity cannot be easily manipulated due to the presence of many orders in the order book. Consequently, this results in a more stable market that would require a large sum of money to have a meaningful effect on the price.
In contrast, a low-volume market can be readily manipulated with a relatively small amount of money, significantly affecting both the price and market capitalization.
Fully Diluted Market Capitalization
Calculating the fully diluted market cap is another way to gain insight into a cryptocurrency's potential future value. A fully diluted market capitalisation is defined as the overall value of the cryptocurrency at today's price if the entire future supply of coins were in circulation.
While the fully diluted market cap might be useful for analyzing established cryptos, investors should consider many criteria when deciding which cryptocurrency to invest in. The current value of the new coin could be inflated simply by allowing for a huge number of future coins.
The Bottom Line
Market capitalization is a crucial metric in the crypto world, as it helps to gauge the size and popularity of a cryptocurrency. Understanding the different types of market capitalization can help investors to make informed decisions when investing in the crypto market.
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