As a new investor, you can buy bitcoin or other crypto coins safely and easily. And while you are at it, you should keep a close eye on the market capitalization of the coin you want to buy. This is because market capitalization is a great indicator you can use to keep track of the market value of any coin. Although, we will not recommend using market capitalization as the only information when you want to invest in cryptocurrency. Nevertheless, market capitalization matters, and we will be sharing why in this article.
What is crypto market capitalization?
As a crypto investor, market capitalization can help you make smarter investment decisions. This is because market capitalization gives you an idea of the popularity and dominance of any coin you want to invest in. In the case of bitcoin or other cryptocurrencies, market capitalization is the total dollar value of all the coins that have been mined. So, you can think of market capitalization as a rough gauge that gives you an idea of how stable a crypto coin is likely to be.
Note that despite bitcoin having the largest crypto’s market capitalization value, it is still volatile. So, when you buy bitcoin, and you use its market capitalization value as a guide, it is no guarantee that the coin will be less volatile. Nevertheless, a crypto coin with a larger market cap is more likely to be stable than one with a smaller market cap. Similarly, digital currency with a smaller market value is more susceptible to seeing dramatic increases and decreases.
How is the market capitalization of crypto coins calculated?
To calculate the market capitalization of any crypto coin, multiply the current price of the coin by the circulating supply. Note that in calculating the crypto market cap, you may see references to a fully diluted supply market cap or circulating market cap. A fully-diluted supply market cap is the total number of crypto coins that can ever exist. While circulating supply, the market cap is the number of crypto coins currently in circulation.
Additionally, coins like bitcoin have a limit on their circulating supply. This means that only 21 million coins can ever exist. However, other crypto coins have a much greater number of coins in circulation like Ripple (XRP), but they are often priced much less expensively. This is one of the reasons why it is expensive to buy bitcoin.
After calculating the market capitalization of any crypto coin, it can fall into any of three investment categories: large-cap, mid-cap, or small-cap.
● Large market cap
Coins that have a market cap of more than $10 billion fall in this category. They are less volatile and are often the safer option. Crypto coins like bitcoin and Ethereum fall in this category. Crypto coins that have a large market cap have higher liquidity. This means that people can cash out their coins without it dramatically impacting the price of the coin.
● Mid-market cap
Coins that have a market cap that falls between $1 billion and $10 billion falls in this category. Most crypto between the two 10 and 50 by market capitalization often falls in this category. A mid-market cap crypto coin can be a good investment, but you have to do your research. This is because mid-cap coins are mildly volatile.
● Small market cap
Coins that have a market cap that falls below $1 billion falls in this category. Crypto coins that fall in this category have the smallest market cap, and they tend to be high risk.
Why is crypto market capitalization important?
When you are evaluating the different cryptocurrencies out there, it’s best to rely on market capitalization rather than the price. While you can use price to measure the value of a crypto coin, the market cap gives more detailed statistics. As such, before you buy bitcoin or any other crypto coin, use market capitalization to determine the growth potential at that specific time and determine whether it is safe to buy bitcoin compared to others.
Let’s look at an example of why the crypto market cap is important when you are about to invest. Assuming you are evaluating whether to buy either crypto A or B. And crypto A has 400,000 coins in circulation while crypto B has 100,000 coins in circulation at that particular time. Now if crypto A is worth $1 and crypto B is worth $2, then the market cap of crypto A will be $400,000 while crypto B will be $200,000 respectively. With this, you can deduce that despite the price of crypto B being higher than crypto A, the value of crypto A is double compared to crypto B.