Cryptocurrency market cap is a very simple and yet one of the most important indexes that investors use to measure the dynamic of a cryptocurrency.
So, what is cryptocurrency market cap?
Market cap shows the total value that a cryptocurrency has and it is calculated if you multiply the circulating supply of the coin with the price of the coin.
Is a necessary index to know before deciding to trade or invest because it provides us information that can’t be found with another way.
In essence, the biggest market caps indicate how popular and stable a cryptocurrency is against another one with a smaller market cap.
After reading the post you’ll be in position to fully understand what is cryptocurrency market cap, how market cap affects crypto prices and what market cap can tell you about cryptocurrencies.
What is cryptocurrency market cap?
First of all market cap is an abbreviation for the term “market capitalization”, which is used for decades by traders and investors in the financial sector.
The usefulness of the factor is to measure the total dollar market value of a company’s shares of stock.
And this is pretty much the meaning of market cap in the crypto market although there are some differences due to the crypto market nature.
In essence, market cap is an indicator that keeps in track the market value of a cryptocurrency.
In fact, the market cap shows how much money (in dollars) do all the investors keep into a specific cryptocurrency.
So if suddenly appeared 1 million new investors and each one of them put 1000$ in Bitcoin, its market cap is going to increase by 1 billion dollars.
The value is calculated when you multiply the crypto coin’s circulation supply with its price.
For example:
The total amount of Bitcoins exist until today are 18.989.637
The price of Bitcoin today in March 2022 is: 41.370,80$.
Subsequently, when you multiply those two you will get the Bitcoin’s market cap:
18.989.637 * 41.370,80 = 785.616.474.399,6
As a result, the market cap of Bitcoin is a little more than 7,856 billions of dollars.
How does market cap affect crypto price?
The size of crypto market cap generally is associated with the stability and the volatility in the price of cryptocurrencies.
Let’s see the example below to clear things out.
Today, the price of XRP is 0.8149$ with market cap at 39.174.269.707$ and the price of DAI is 0.9997$ with 9.964.986.135$ market cap.
Ostensibly, both prices look the same.
So, if we only take into consideration their prices we will understand that XRP and DAI have pretty much the same possibility for their price to rise or to go down.
If however, we take a look at both of their market caps we will realize that XRP’s (39$ billions) market cap is 4 times bigger than the DAI’s (9,9$ billions).
Those numbers help to conclude this:
In order for the price of DAI to go 4 dollars (300% rise), all it could take is the investors to put almost 30 more billions to buy DAI, and so the market cap is going to reach 39,6 billions of dollars.
On the other side:
In order for XRP to see a rise of 300% it will need to find people to invest on it additionally almost 117 billions of dollars and its market cap will be 156 billions of dollars.
Consequently, XRP price fluctuations are expected to be less volatile when compared with DAI, because in order to see big price movements we will also have to see a lot more billions of dollars get traded.
So market cap gives us the hint that if we want to invest in a more stable cryptocurrency we should choose XRP over DAI.
On the other hand, if the goal is to take advantage of the price volatility then DAI seems more suitable from XRP.
The prices and the market cap amounts have been taken by coinmarketcap.
What does the market cap tell you?
Spending time researching cryptocurrencies market cap will put you in position to draw safer conclusions concerning your investment.
First of all, market cap can tell us the popularity of each coin compared with the other.
For instance, Bitcoin’s price is around 41.000$ and Ethereum’s is around 3.000$.
A difference that makes Bitcoin look like a giant in front of the second more popular altcoin.
But if we compare their market caps the picture will be different, since Bitcoin has 7,856$ billions and Ethereum 3,509$.
Market cap has just helped us realize that Ethereum is still less popular than Bitcoin, but the difference between them is a lot smaller than their prices show.
The second conclusion market cap helps us come to is the stability or the volatility of each coin.
Of course it is not the only factor that can help you achieve that, but is among the most important.
In a nutshell, it would be right to say that the bigger market cap a coin has, the less volatile we expect it to be, especially in the long term.
For instance, large market cap will be suitable for those who want:
- To minimize the risk from crypto investing
- Invest in long term
- Wealth perseverance to avoid inflation from fiat money
On the other hand, the less risk you are exposed to, the fewer opportunities to make big profits.
So if you want to make big money by investing less you might want to get involved with cryptocurrencies with small market caps.
But you should always keep in mind that this kind of investment has a good possibility that you might end up losing your money.
Final thoughts
If you want to get involved in the cryptocurrency world it is essential to understand what the cryptocurrency market cap is.
And that’s why it will help you get more informed and smart decisions about your crypto investment.
Image Source: Jorge Franganillo
