When you are about to invest in a business or project, one of the metrics used in evaluating is Market Capitalization (MCap). This is because market capitalisation represents how much investors perceive a company’s worth in the stock market. It’s the same thing as in crypto, where it reflects how much the market values a cryptocurrency.
Market capitalisation is an important metric in crypto, and this article will explain what it is, how it is calculated, and why it matters. You will also learn about the categories of coins based on market cap, how market cap compares to other metrics, and its limitations. Sit back, as this will be an interesting read.
What Is Market Capitalization?
The value of the crypto market cap is the sum of all the crypto coins in circulation. The coin/token price drives this gauge and allows you to estimate a coin’s size, stability, and growth potential.
Market cap doesn’t always reflect a coin’s true worth. Some coins are hyped up by speculation and have no actual use case. The market cap also does not mean liquidity. Instead, it is the perceived value of a token.
Suppose you and other investors think a coin has excellent growth potential or is valuable. This would increase that coin’s demand and price, ultimately affecting the market cap.
How is Market Capitalisation Calculated?
As stated earlier, the market cap of a coin in circulation is set by its price. This is how we calculate the market cap.
Market Cap = Current Coin Price X Number of coins in circulation.
Using Bitcoin as a case study, let us find its market cap.
Market cap = Current Bitcoin Price X Number of Bitcoins in circulation.
$1,812,333,981,577 = $91,415.08 X 19,832,965
This shows that, as of today, the current market cap of Bitcoin is approximately 1.8 trillion dollars.
Every coin has three types of supply, and they are:
- Circulating Supply – The quantity of coins in circulation. This is what’s used to calculate market cap.
- Total Supply – The number of existing coins, including those not yet released into circulation.
- Max Supply – The maximum number of existing coins (e.g., Bitcoin’s max supply is 21 million BTC).
If a coin has a low circulating supply but a high max supply, its market cap could rise quickly if more coins are released, potentially affecting price stability.
Read More: What Is a Whitepaper? Why is it Important for New Crypto Projects
Why Market Capitalisation Matters?
Market Cap is necessary for the following reasons:
- Measures Cryptocurrency’s Size & Stability: Every crypto coin has its market cap size. A coin with a higher market cap shows that it is a well-established and trusted crypto asset. In general, large-cap cryptocurrencies such as Bitcoin and Ethereum are considered to be more stable.
- Helps Compare Cryptocurrencies: Market cap provides a more accurate value assessment than price per coin.
- Influences Investment & Trading Strategies: Before investing, you can use market cap to assess the level of risk a crypto project carries. Large-cap cryptos are at a lower risk, while small-cap coins offer higher potential gains.
- Reflects Market Sentiment & Adoption: A rising market cap indicates growing adoption, but it may signal declining investor confidence when it falls.
- Helps Identify Market Trends: When you monitor changes in the market cap of a coin, you will know when to bullish or bearish movements in the crypto space.
Categories of Market Capitalization
There are three primary market capitalization sizes or categories of cryptocurrencies: large-cap, mid-cap, and small-cap. Each size shows different levels of stability, risk, and growth potential.
- Large Market Capitalisation: Cryptos with large market caps are valued at $10 billion. These cryptos are well-established and highly adopted and have high liquidity as well. They are less risky to invest in, but their rewards or profits are lower. Coins under this category have high trading volumes, too. Examples are Bitcoin, Ethereum, XRP, etc.
- Middle Market Capitalisation: Also known as mid-cap, crypto projects with this size are valued between $1 billion and $10 billion. Mid-cap coins show a strong growth potential but are still volatile. These coins develop innovative use cases to boost investment and could become large-cap projects. Examples are Solana (SOL), Cardano (ADA), Polkadot (DOT), etc.
- Small Market Capitalisation: Any cryptocurrency with a market cap of less than $1 billion is a small project. These coins/projects are very volatile, as their prices can fluctuate at any given time. They are very risky to invest in but come with big rewards, too. It is difficult to determine the growth potential of a small market cap coin, as some fail, and others do well. Examples are meme coins and newly launched altcoins.
Also Read: Ten Facts About Memecoin Trading
Market Cap Vs. Other Metrics
| Metric | Definition | Key Difference from Market Cap | Importance |
| Market Cap | The total value of a cryptocurrency is calculated as Price × Circulating Supply. | Measures current valuation based on available tokens. | Used to compare crypto assets and assess size/stability. |
| Fully Diluted Market Cap | Total value assuming all possible tokens are in circulation (Price × Max Supply). | Considers potential future supply, which may impact price over time. | Helps evaluate long-term valuation and inflation risk. |
| Trading Volume | The total value of a crypto asset traded within a specific period (e.g., 24 hours). | Market cap measures total value, while volume shows real-time activity and liquidity. | High volume suggests strong market interest and liquidity. |
| Total Value Locked (TVL) in DeFi | The sum of all locked assets in DeFi protocols. | Market cap measures a token’s value, while TVL shows how much is actively used in DeFi applications. | Indicates DeFi adoption and the strength of a protocol. |
Read More: What Is Fully Diluted Valuation in Crypto?
Limitations of Market Capitalisation
As helpful as the market cap of a crypto coin is, several drawbacks come with using it as a metric, which are:
- Price manipulation: The Crypto market cap depends on price, which can be easily manipulated for pump-and-dump schemes to increase the coins’ value.
- Illiquid Assets: A project with a high market cap but low liquidity will mislead you when valuing it due to its limited real-world use.
- Circulating Supply Issues: Some projects withhold their circulating supply at a certain level to manipulate their market cap upwards so that their coin appears to be worth more than it is.
- Doesn’t Reflect Real-World Utility: The value of a coin/token can also be inflated without being proportional to the real-world use.
- Centralised Holdings Can Mislead Investors: Small entities controlling large portions of tokens can misrepresent decentralisation and lead to price manipulation.
- Doesn’t Measure Financial Health: The Crypto market cap doesn’t consider revenue, profits, or assets, making it unreliable.
- Susceptibility to Sudden Crashes: Cryptos, especially small-cap coins, can quickly lose significant value, making market cap an unstable indicator of long-term worth.
Conclusion
Market capitalization is a handy tool for assessing cryptocurrencies, but it is not the only thing you should trust. Because it makes you conform coins, evaluates risk, and apprehends market movements, market cap still holds the limitations of price manipulation, liquidity issues, and wrong valuations. It is always advisable to combine market cap with other metrics, such as trading volume, utility, and adoption, before investing.
