Understanding market capitalisation (or “crypto market cap”) is essential for crypto investors trying to make well-informed investment decisions. This article will explore what cryptocurrency market cap is, and how it can be used to indicate the value of cryptoassets.
Market capitalisation is a relatively straightforward concept, calculated by a simple equation that can help investors to determine the value of a cryptoasset. It is important to understand what insights a cryptoasset’s market cap can provide, and how to apply them to your investment decisions.
What is a cryptocurrency market cap?
Traditionally, market cap indicates the total value of shares of a company’s stock. The crypto industry has adopted market capitalisation, or “crypto market cap,” as a similar metric to indicate the overall market value of any given cryptocurrency.
How to calculate a cryptocurrency market cap
Crypto market cap is calculated by multiplying the price of a coin by the total number of coins in circulation.
For example, in the screenshot below, the price of Stellar (XLM) is $0.124. The maximum supply of XLM is around 50 billion tokens, and 57% of the supply is currently in circulation (approximately 28.3 billion XLM tokens).
If you multiply the current price of XLM ($0.124) by the number of tokens in circulation (28.3 billion), you’ll reach a market cap of $3.5 billion.
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Source: eToro
Why is the crypto market cap important to investors?
It is important for investors to understand what is meant by crypto market cap, as it allows them to see past the price of a cryptoasset to gain a better, overall insight into its value.
Market cap allows for comparison between coins, enabling investors to compare the relative size and value of one cryptocurrency with another. Data from a wide range of cryptocurrencies can further indicate the total crypto market cap, as a measure of how the asset class is performing overall, relative to commodities or CFDs, for example.
This can offer investors wider market insight and can help them to formulate decisions about whether now is the right time to invest.
Investors should also be aware of how market cap can impact the price of an individual cryptoasset by influencing its perceived value and investor sentiment. A higher market cap can indicate increased stability and demand, signifying investor confidence and thus, driving the price upwards.
Maximum vs circulating supply
It is important that crypto investors do not just take market cap metrics at face value. There are several differences between crypto and traditional financial markets that should always be considered.
In traditional financial markets, “free float” metrics can differentiate between shares that are available to be publicly traded, and those that are held in “lock up,” perhaps by company founders, directors or executives. This essentially differentiates between the total (or “maximum”) supply and the circulating supply of shares.
Similarly, in the crypto sector, a coin’s maximum supply can differ from a coin’s circulating supply, but the difference between these two metrics is not always made abundantly clear.
Maximum supply refers to the maximum number of cryptocurrency coins or tokens that can ever exist. Some cryptoassets, such as Bitcoin (BTC), have limits to their maximum supply, meaning a predetermined number of coins will ever exist. Others, such as Ethereum (ETH), have an infinite supply.
On the other hand, circulating supply refers to the number of coins that exist in open circulation (free float) at any given time.
These metrics can differ. As well as a potentially significant volume of privately issued or owned coins held in lock up, there are also coins awaiting release in an ICO. Some coins are lost over time, and others may simply remain stagnant in anonymous wallets.
Tip: Investors should understand how various factors can influence the total and circulating supply of a cryptoasset.
Generally, market cap calculations are determined using circulating supply metrics. But, when calculating or considering market cap, it is crucial to be aware of which metrics have been used, and to understand the implications that either may have on the outcome.
How are crypto market caps categorised?
Cryptocurrencies fall into one of three categories, depending on the value of their market cap:
Large-cap cryptocurrencies
Large-cap cryptocurrencies have a market cap of over $10 billion. They are generally considered lower risk investments, as they have more liquidity and are better able to withstand market volatility. BNB Chain (BNB) is a good example of a large-cap cryptoasset.
Medium cap cryptocurrencies
Mid-cap cryptocurrencies have a market cap of between $1 billion and $10 billion. They are widely considered to be medium-risk investments, because although they are more volatile than large-cap cryptoassets, many investors believe that untapped opportunities lie within coins of this category.
Small-cap cryptocurrencies
Small-cap cryptocurrencies have a market cap of lower than $1 billion, and are deemed to be the riskiest investments. Whilst they have greater upside potential, small-cap coins are most susceptible to market volatility and generally have lower liquidity to withstand sudden, or high-volume, market movements.
What are the largest crypto market caps?
The chances are, even for those new to crypto, investors will be familiar with some of the largest market cap cryptocurrencies.
- Bitcoin (BTC) is the largest crypto by market cap. It was the world’s first cryptocurrency and has revolutionised decentralised finance. According to eToro data, as of December 2023, it had a market cap of $815.45 billion.
- Ethereum (ETH) is the second-most-popular cryptoasset, popularised by the ability to build upon its blockchain and facilitate the use of decentralised applications (dApps). According to eToro data, as of December 2023, it had a market cap of $260.95 billion.
- XRP (XRP) assists with currency exchange and cross-border payments. It allows businesses to send money overseas quickly and affordably. According to eToro data, as of December 2023, it had a market cap of $32.34 billion.
- Solana (SOL) is the native token of the Solana blockchain, which can facilitate the creation of dApps. The SOL token itself can be used within the Solana network to pay transaction fees and run smart contracts. According to eToro data, as of December 2023, it had a market cap of $30.56 billion.
- Cardano (ADA) is the native token of the environmentally friendly, Proof of Stake (PoS), Cardano blockchain. According to eToro data, as of December 2023, it had a market cap of $20.15 billion.
- Dogecoin (DOGE) is an altcoin (or a “meme coin”) that gained popularity during the COVID-19 pandemic as a result of social media. It is infinite in supply, and according to eToro data, as of December 2023, had a market cap of $12.76 billion.
Final thoughts
Crypto market cap can offer valuable insights into the wider context of many cryptoassets. It should not be misunderstood as a direct indication of value, but when considered in line with a well-thought-out investment strategy, market cap can help crypto investors to understand more about the perceived value, size and stability of a cryptoasset.
Learn more about investing in crypto by visiting the eToro Academy.
Quiz
FAQ
- Is market cap alone enough to determine a good investment?
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No, market cap alone should not be used to determine the strength of a coin’s investment potential. It should be used as an insight, alongside consideration of other factors such as use case potentials, ownership and development structure, and the underlying blockchain technology.
- What is meant by the term “Volume %”?
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Volume % is usually shown alongside market cap and price data to demonstrate the trading volume of a cryptocurrency within the last 24 hours. The percentage shown will be the percentage change in trading volume, either positive or negative.
- Are coins with large market caps always more stable?
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Generally, coins with larger market caps are considered to be more stable than those with smaller market caps. However, even the price of large-cap coins, such as bitcoin, can be highly volatile. As with all asset classes, it is sensible to diversify your portfolio across the small-, mid- and large-cap cryptoassets, to help manage your risk.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
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