Crypto

Understanding “Market Capitalization” in Just 3 Minutes – The ₿log

In 2017, a study by the American bank JP Morgan showed that the total amount of capital invested in cryptocurrencies between 2009 and the end of 2017 was about $6 billion. At the time of the appearance of these lines, the total capitalization is approaching $1,000 billion. This capitalization itself was more than $3 trillion less than a year ago (November 2021) at the height of the bull market.

But behind these sky-high numbers, what exactly are we talking about? What is the purpose of market capitalization in cryptocurrency? We will explain it to you in less than 3 minutes.

What is “market capitalization”?

In cryptocurrency, as in financial markets, “Market Cap” (market capitalization) corresponds to the following formula:

Total market capitalization = Asset price (here cryptocurrency) x number of tokens in circulation

NB: You can view the rankings of the major cryptocurrencies in real time, as well as the total market capitalization. The site “coinmarketcap” remains the benchmark in this area.

How to interpret market capitalization?

There is an important distinction that needs to be made in order to fully understand what market capitalization means. The total amount of cryptocurrencies should not be confused with the total amount of cryptocurrencies in circulation. For example, we know that there will eventually be 21 million bitcoins, while there are currently about 19 million bitcoins in circulation. This mechanically affects the calculation of market capitalization.

If the calculation is based on 21 million bitcoins, then we are talking about “fully diluted market capitalization.” The formula will be:

Fully Diluted Market Cap = Current Value of a Cryptocurrency x Total Quantity of that Cryptocurrency

So with this option, you understand that cryptocurrencies created with a few hundred billion tokens (like Sheba and its 500+ billion tokens) could theoretically never reach huge value unless a burn mechanism is introduced.

What is it used for?

For private and professional investors, cryptocurrency capitalization is fundamental data. It is usually analyzed to determine the popularity of the cryptocurrency and its place in the cryptosphere. As an example, and unsurprisingly, bitcoin has been the largest capitalized cryptocurrency since its inception, well ahead of ethereum.

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Behind this comparison of numbers and ranking is the question of the difference in prices. Indeed, Bitcoin or Ethereum are behemoths (more than 50% of the entire crypto market). Their variations alone are enough to turn the entire market (altcoins) in one direction or another.

Another lesson is related to the problem of volatility. A “heavyweight” cryptocurrency like Ethereum will experience much less noticeable and dramatic changes than “small” cryptocurrencies with a capitalization of less than a billion dollars. This also leads to risk for the investor in case of extreme volatility (more potential profit with increased risk).

Conclusion: an important indicator of the crypto-ecosystem

Market capitalization is an important indicator that allows you to get an idea of ​​​​the place of the cryptocurrency in the ecosystem and realize its potential.

However, market capitalization cannot be the only instrument an investor observes. This tool cannot be called an indicator of the popularity of cryptocurrencies. Indeed, a cryptocurrency can have a very high capitalization, but suffer from a severe lack of liquidity. In addition, other indicators must be used. It could be the volume of the exchange or even the analysis of asset centralization for the best investment in the crypto universe.

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