What is cryptocurrency market capitalization?
Market capitalization, usually abbreviated to «market cap,» is the current market value of a cryptocurrency network. We calculate it by multiplying the number of crypto assets in circulation by the corresponding asset price.
Let’s assume we have two crypto networks, AliceCoin and BobCoin. The total supply of AliceCoin is 1,000 coins, and they are all in circulation. BobCoin implements the Proof of Work algorithm and currently has 60,000 coins in circulation out of 100,000. The current market price for AliceCoin is $ 100, and BobCoin is $ 2. Which coin has the higher market cap?
Market Cap = Supply × Price
AliceCoin capitalization = 1,000 × $ 100 = $ 100,000
BobCoin capitalization = 60,000 × $ 2 = $ 120,000
Even though BobCoin is 50 times cheaper than AliceCoin, the cost of its network is still higher than that of AliceCoin. This is why market caps better reflect the value of the network than just the price of a single coin.
What is the total market capitalization of cryptocurrencies?
Total market capitalization reflects the combined value of Bitcoin, altcoins, stablecoins, tokens, and all other crypto assets in the market combined. This indicator is considered vital because it indicates the size of the industry as a whole.
Due to the relatively high volatility of the cryptocurrency markets, the value of capitalization tends to change. During the first six and a half years of the existence of cryptocurrencies, the total market capitalization did not exceed $ 20 billion. Since the last peak of $ 770 billion in 2018, it has hovered in the hundreds of billions.
What is cryptocurrency market capitalization used for?
The combined cryptocurrency market capitalization is often used as a basis for comparison with other sectors of the economy. For example, many analysts compare the total market cap of cryptocurrencies to the market cap of precious metals or stocks.
Why is it done this way?
This characteristic provides a rough estimate of where and how the crypto market could grow in the coming years and decades.
However, no one knows how to best estimate the value of cryptocurrencies and blockchain projects. These comparisons can be helpful, but they cannot be blindly trusted.
Comparing different financial markets is often not helpful. Various industries attract different types of investors. Cryptocurrency will not by default attract exchange traders, currency traders, and precious metals, speculators. Cryptocurrencies are a new and thriving asset class and should be treated accordingly.
Why may the total cryptocurrency market capitalization be inaccurate?
Making financial decisions based solely on the total cryptocurrency market capitalization can be misleading for many reasons.
First, it is necessary to correctly calculate the market value of each project separately. To do this, you need to take the total supply and multiply it by the asset price.
But it can be difficult to find out reliable information about an offer. If this data is incorrect, then all further calculations will automatically become incorrect.
Second, the market capitalization of some projects can be manipulated. Some projects do this to instill a false impression of security and value. Looking at just the total market cap without wondering what it means will lead to potentially risky financial decisions.