The act of investment is a risky process in and of itself. You are banking on the idea that the project you are supporting and pouring your money into will work out in the long run. It is a gamble, to put it bluntly, because if you are not too careful with what you decide to invest in, there is a chance – no matter how high or low – that you could lose your money and it could reflect poorly on you in the future should you invest in anything else. While the odds are rarely one in a million, it is still a long shot.
However, there are certain tools that assist in determining which project or company is a good choice to invest in. Naturally, this includes cryptocurrency, and this tool is called the ‘Cryptocurrency Market Cap.’ This digital measurement apparatus utilizes the general consensus of a currency’s value and ranks them based on the probability of their success. That is not to say that it is a 100% accurate measurement (a point that will be discussed later), but it is one of the more dominant tools that investors in the crypto-field employ in their endeavors.
As a remark of discretion, the numbers that will be used in relation to the market cap are based on what they are at the time of this writing; what is at #7 now could later have gone up to #6. These numbers have in all probability changed since this article’s publication, so do not discredit any changes for fabricated information.
What exactly is Market Cap?
The cryptocurrency market cap is a metric system that is used to understand the value of cryptocurrencies of all sorts. The chart is divided into six sections and measures the cryptocurrencies based on these divisions: the market cap, the price, the volume within 24 hours, the circulating supply, the change within 24 hours, and the price graph within seven days. In addition, there are indications given as to which currencies are mineable and which are not.
In order to calculate the market cap of a coin, the following formula is required:
Total Circulating Supply x Price of each coin = Market Cap
Basically, the market cap is what you would get as the product of the circulating supply of the coins and the price of each coin. The market cap itself does not inherently determine the value/price of each coin. The market cap of one currency – Coin A – could be much larger than the market cap of another currency – Coin B – but if that other, lesser currency has a price of $5 per coin and the larger currency has a price of $2 per coin, than Coin B’s overall value is worth much more.
A market cap’s key purpose as a metric is to mainly indicate the general worth of a company, rather than signifying the price of the individual tokens.
Looking at the market capitalization chart, you will notice that EOS is at the #5 spot and Bitcoin Cash is at #6, in spite of the price of Bitcoin Cash being worth much more than the price of EOS, as Bitcoin Cash’s is $123.46 and EOS is just $2.79. Because EOS has a larger market cap and circulating supply, it will rank higher than Bitcoin Cash regardless of its reduced coin price.
The importance of measuring currency based on its market cap above anything else is to determine the risks if one chooses to invest in any of these currencies.
The Three Caps
Cryptocurrencies can be placed into any of these three categories:
- Large-cap: These cryptocurrencies often retain a big market cap and are therefore safer investments to partake in. These mainly include companies with market caps of over $10 billion, including Bitcoin, Ethereum, and XRP.
- Med-cap: These are cryptocurrencies that have a marginally smaller market caps and are also more risky to invest in than large-cap currencies. These are typically cryptos with market caps that range between $1 billion and $10 billion, including but not limited to Bitcoin Cash, EOS, Binance Coin, and Litecoin.
- Small-cap: These cryptocurrencies are the ones that have the smallest market caps and are also the highest risks to invest in because of their chances of potential failure being much higher than the rest. These are mainly companies whose market caps are below $1 billion, like Monero, Dash, Ethereum Classic, NEO, and many others.
An additional benefit to the market cap is that it provides insight into the growth potential and gives eager investors a good idea on which cryptocurrency would the ideal one to pour their money into.
- Large-cap cryptocurrencies typically do not experience much – if any – major growth and is considered to be a ‘safe’ investment when compared to the other categorized caps.
- Mid-cap cryptocurrencies have more potential for growth, ultimately leading to more risks. This potential growth often stems from their market still in the process of development.
- Small-cap cryptocurrencies are essentially at the mercy of the market. The investment amount could go down substantially at any given moment.
Stocks & Crypto: What’s the difference?
Not surprisingly, the concept of ‘market capitalization’ originated in relation to the stock market. How stocks normally work is that by owning a company’s stock, this will give you a share of the ownership by default. Ownership pertains to two primary things:
- Obtaining the right to a portion of whatever the company’s future income is distributed through dividends.
- Receiving a comparable amount of proceeds should the company ever be sold.
Before we move forward, the term ‘dividends’ should be elaborated on if what follows is going to make any sense to those who are unaware of or have otherwise very basic knowledge of the details.
By definition, a dividend is a payment that is made by a corporation to its shareholders in the form of either cash (called ‘cash dividends’) or stocks (called ‘stock dividends’). Most stable companies provide their shareholders with a dividend, and a shareholder can view a dividend as their share of the company’s profits. One incentive for this is that the stock prices for companies that are financially secure ordinarily do not move a great deal, so dividends are offered to persuade, reward, and maintain investors.
Investopedia writer, Jean Folger, explains that, “Many investors use dividend-paying stocks as part of a long-term wealth building strategy. Often, this involves reinvesting the dividends to take advantage of the power of compounding and eventually using the then-larger dividend payments as a source of income during retirement.”
The market cap of the company is the total value of all the shares and is a rough estimate of both its ability to produce revenue and any potential there could be for growth. A large percentage of the company’s stock is in possession of the founders, as well as other notable shareholders. In regards to cryptocurrency, a significant fraction of the tokens created is held by both the company heading the project and ‘whales’ (a frequently used term that describes “big money” Bitcoin players that have a hand in the Bitcoin market) who have taken the tokens and keep them inactive by preserving them in their wallets.
Cryptocurrency does not dabble in dividends as stocks do. With stocks, the owners that have them will end up earning them as dividends, thus it will dilute the stocks that are owned by other shareholders. When a whale hoards crypto in their wallets, it remains there and nothing happens to these tokens. This action – or technically lack of action – will alter the liquidity of the currency.
According to this PYMNTS article, 9.4% of circulating Bitcoin currency is being held inside 100 inactive wallets. While this percentage may not seem like a lot, its effects are actually quite abundant. Overspending can lead to token velocity, and token velocity increases whenever people are selling their tokens at a quick rate. In this sense, high token velocity leads to low network value, and since these tokens have low liquidation, the lack of velocity inflates.
So in the grand scheme of things, the market cap can be considered a more accurate metric for stocks than it is for cryptocurrency, as the caps do not allow for an accurate evaluation about the value of a currency. It is unknown just how many tokens are being left dormant in wallets and what is their true velocity.
It is certainly not difficult to tell that the cryptocurrency market cap metric is a mixed bag. While it is a key tool – and a popular one at that – in deciding which currency would be the wiser choice to invest in, it also does not guarantee accuracy and security. The best advice one can give to any potential investor looking into contributing to any cryptocurrency is using the market cap if you so choose to, but also do a fair amount of research on each one. By analyzing each of your choices and comparing their success rates to their competitors, you are already one step ahead.
The market cap is obviously not without its perks. Granted, it does not give you a definite number regarding its past outcomes and current status of success, it provides a general ballpark of it. On top of that, frequent checking in on the stats also boosts your knowledge on not just the market cap, but also the prices of the coins and the circulating supply amount.
Market cap can only get you so far, but it is a helpful stepping stone to something greater.