When you're a crypto trader, you'll have to deal with concepts that are sometimes new to you. These terms you'll often encounter quite often. The market cap is one of these concepts, which you'll encounter on almost every crypto website.
Especially on websites where you can follow the price of a cryptocurrency
or token, the market cap is a concept that you will often encounter. After reading this article you will understand what it is and find out that it is very useful to know what the market cap of a cryptocurrency is before you invest in it.
What is market cap?
The market cap is an indicator that measures and tracks the total value of a cryptocurrency or token. It shows how much money is currently rolling in a cryptocurrency. It’s not hard to calculate the market cap of a cryptocurrency. You only need the current price of the coin or token and the total number of coins/tokens in circulation. It is calculated as follows:
Market cap = price of the coin X the number of coins/tokens in circulation
So, we can calculate the market cap quite easily. As an example, let's calculate the market cap of Chainlink (LINK
) using the above formula. This will make it easier for you to understand how the market cap works and how you could calculate it by yourself:
$24.33 (price) X 431,009,554 LINK (in circulation) = $10,510,861,606 (market cap)
You can see that the market cap can be calculated incredibly quickly. In most cases, the market cap is already shown on the website where the price of the coin is also shown. This means that you don't have to calculate the market cap yourself. However, it is important to understand what a high/low market cap says about a cryptocurrency.
Current number of circulating coins vs. total supply
It is important to note that this is the number of coins in circulation at the current time. So, you shouldn't confuse this with the total supply that will eventually be available.
In fact, every cryptocurrency or token has a current circulation and a total circulation. The total circulation is the number of coins or tokens that will eventually be available. In the case of Bitcoin
, this is 21 million coins. However, not all coins have been mined yet. In fact, there are (at the time of writing) 18.7 million coins in circulation. This is the current supply of Bitcoin.
What does market cap say?
The market cap indicator is often used to rank cryptocurrencies (at least this is the factor usually taken into account) and measure popularity. With it, we can divide cryptocurrency into three different categories. This is done according to the following way.
- Large-cap: the market cap, in this case, is greater than 10 billion, which means that it is a very large market capitalization.
- Middle cap: the market cap, in this case, is between 1 and 10 billion, which means it is a medium market capitalization.
- Small-cap: the market cap, in this case, is less than 1 billion, which means it is a low market capitalization.
Finally, the total market cap is used to calculate the market cap of all cryptocurrencies in the market. This means that is the total value of all cryptocurrencies in the world. You can also think of this as the total amount of money involved in crypto.
From this data, the famous Bitcoin dominance chart indicator is also derived. This indicator shows the total share of Bitcoin in the entire crypto market. For example, Bitcoin could dominate 54% of the market. That means Bitcoin's market cap at that time is 54% of the total market cap of the entire crypto market.
With this indicator, you could determine when Bitcoin is more popular than the altcoins
or determine when it is alt season (and thus the altcoins have a relatively larger share of the market than Bitcoin).
For what can you use the market cap?
First and foremost, the market cap is an indicator that allows investors to get information about the potential of a cryptocurrency. In principle, investments in cryptocurrencies with a large market cap are considered safer than those with a small market cap. After all, the volatility, in that case, is often much lower. The expected returns are therefore also much more limited.
In general, the market cap is an indicator with which you can get an idea about a cryptocurrency. And also, to compare it with another currency, which is not possible when you use the unit price (current price). Comparing rates with each other often says very little. This is because a currency with more coins in the circulation generally has a lower price than a currency with fewer coins in circulation. This has to do with scarcity and supply and demand.
The total market cap also allows us to measure the health and evolution of the cryptocurrency ecosystem, even though it is not the only indicator that can do so. However, a rising total market cap usually indicates good growth in the sector.
Bitcoin's dominance resulting from the evolution of this total market cap is also an important indicator. It allows crypto traders to observe the growth or decline of altcoins. When the market cap of Bitcoin declines relative to the altcoins, it means that the altcoins are becoming more popular compared to Bitcoin. This is because there are then more people investing their money in altcoins than in Bitcoin. In this way, you could also recognize altseason.
Other indicators for crypto-traders
The market cap is an indicator that shows how much money is in circulation in a particular cryptocurrency. However, the exact numbers are not exactly known. For example, it can also happen that someone bought half a million Bitcoins in 2010 but lost the private key to his wallet.
This means that on paper there are many Bitcoins in circulation, while these Bitcoins will never actually come into circulation again. This is one of the situations that can cause the market cap to be seen as unreliable.
Another situation that can put the market cap down as an unreliable indicator is the price of a cryptocurrency. It is common knowledge that the price of cryptocurrencies and tokens is very volatile, which can make it irrelevant to an analysis.
Suppose there is someone who buys 1 Bitcoin for $30,000, the total market cap would be about $561,000,000,000 (at a circulation of 18.7 million). However, it is also possible that 10 minutes earlier someone bought 1 Bitcoin for $25,000 which would mean that the market cap at the time of purchase is incorrect.
Over a longer period of time market cap can be a useful indicator, but often it is not an accurate one when viewed over minutes or hours. Therefore, it's important to also make use of other indicators which you can use as a crypto trader. That way you can determine for yourself much better whether it is a wise time to buy your crypto coin or token of choice at Coinmerce.