Market capitalization (often referred to as "market cap") is a term used in to describe the size of a company, asset, or cryptocurrency relative to the overall market. Using the formula for market cap, anyone can determine market cap: Market Cap = number of shares * share price.
In this article, we will explore the relationship between cryptocurrencies and market cap and the different market cap categories.
What is a Market Cap?
The method of calculating the crypto market cap of a cryptocurrency is the same regardless of how the supply is distributed. The cost of each token is multiplied by the coin's number in circulation.
Each cryptocurrency asset has its own method of calculating its supply. Take Bitcoin, for example: until the supply of Bitcoin reaches 21 million, on average, almost 1000 new Bitcoins are mined every day. As a result, there are daily fluctuations in market cap caused by two variables:
• Change of supply
• Buy and sell influences
Burning is another consideration for cryptocurrencies like Bitcoin that do not have a fixed quantity. The burning process completely removes coins from circulation.
This means we can add another driver of market cap into the mix:
• Supply change and token burning
• Buy and sell influences
Finally, some companies produce coins that follow a set unlocking schedule. For example, when ApeCoin (APE) launched, 1 billion tokens were available. However, at its debut in May 2022, only 30.25% of tokens were circulated to ensure scarcity and value. After a predetermined distribution by Yuga Labs, the tokens will be unlocked over two years.
Since ApeCoin does not have a token-burning mechanism, the utility will determine crypto market cap.
The Relationship Between Crypto and Market Cap
A fairly direct correlation can be established between the market cap of a cryptocurrency and its popularity. However, remember that when a cryptocurrency is adopted and used, the link between supply and demand expands, causing market price fluctuations.
When a cryptocurrency is used intensively, and there is a persistent demand for it, its value increases, and when this value is multiplied by its currency, the market cap of the cryptocurrency increases. Since the reverse case is also conceivable, there is undoubtedly a correlation between the market cap of a cryptocurrency and its popularity.
The correlation is so significant that many cryptocurrency analysts pay close attention to identifying events that could be useful for their trading activities. This is due to the fact that cryptocurrencies with high market capitalization are usually considered safe assets and therefore make good investment targets. So, it is obvious how market cap and the popularity of cryptocurrencies are related.
Categories of Crypto Assets Based on Market Cap
Market caps use four categories to group the relative value of different assets in the crypto market. Thanks to these classifications, you can more easily compare the total value of one cryptocurrency to another, which will help you make smarter investment decisions.
The four categories of the market caps of cryptocurrencies are as follows:
High-market cap cryptocurrencies have significant market caps and are often considered safe cryptocurrency investments. When the market cap of a cryptocurrency exceeds $10 billion, it is called a large market cap. Examples of high-market cryptocurrencies include Bitcoin and Ethereum (Bitcoin has the biggest market cap).
The market caps of mid-cap cryptocurrencies ranges from $1 billion to $10 billion. Therefore, mid-cap currencies are generally considered to have unrealized profit potential but are riskier investments.
In general, mid-cap cryptocurrencies perform well in the long run. However, not all mid-cap coins have the potential to become large market cap assets. The mid-cap category of currencies includes tokens such as Litecoin and Cardano.
This type of cryptocurrency includes coins and tokens with crypto market caps between $100 million and $1 billion. Even though they have the potential to increase in value in the short term, cryptocurrencies in this category are extremely volatile and are considered risky investments.
Dogecoin is an example of a small-cap cryptocurrency.
Compared to small market cap coins, micro-cap investments are considered riskier. A market cap of less than $50 million is typically associated with new coins launched by individuals or anonymous companies.
What is a Fully Diluted Market Cap?
To calculate its cap, we need to know how much cryptocurrency costs per coin and how many coins are currently in circulation worldwide.
But what happens when all the available supply of cryptocurrency is used up? Fully diluted market cap is the term used in this case. A fully diluted market caps measures the value of a cryptocurrency after all of its coins have entered global circulation. As previously Bitcoin's total supply is capped at 21 million.
Therefore, Bitcoin's market cap shall be considered fully diluted when its global circulation reaches this value.
Market Cap is Not an Accurate Representation of Company Value
Crypto market cap does not represent the value of a company's equity. The market price on which the value of a company is based does not accurately reflect the value. In addition, the market often over- or undervalues shares, so the market price represents only what the market is willing to spend on its shares.
It says nothing about how much it would cost to buy a company in a merger, although it does measure the price of buying all the shares. Enterprise value is a more accurate way to determine the cost of buying a company outright.
Why is a Market Cap So Important?
In general, cryptocurrencies with larger crypto market capitalization attract more investors and have a greater impact on the value of other coins and tokens. This is one of the reasons why the market capitalization of a cryptocurrency is usually used to determine its position in the crypto market. However, more than pricing is needed to assess the position of a particular cryptocurrency on the market, and this is where market capitalization comes in.
Moreover, market capitalization can reveal trends. For example, a group of cryptocurrencies used in decentralized financial applications or NFT trading may rise or fall in value, indicating that the market is attracting or repelling investors.