The cryptocurrency industry has its own jargon, which can confuse outsiders. Market capitalization is one of the main jargon to understand. It describes the total worth of a token, which is essential to evaluate whether it’s worth investing in. We’ll dive deeper into this terminology in this article.
What Is Market Capitalization?
It is the total value of all units of a digital token or any other asset. You calculate it by multiplying a coin’s circulating supply with its current price. For example, if there are 100 ABC tokens in circulation trading for $5 each, the market cap of ABC is $5 x 100, making $500.
This metric gives you insight into a coin’s stability and long-term value. Cryptocurrencies with larger market caps are more stable than those with lower capitalization.
Token prices fluctuate within seconds and, consequentially, market capitalizations. You can hardly get the perfect capitalization of a currency, but you can always get near-accurate estimates.
Why Is this Metric Important?
This metric tells much about a coin’s stability, popularity, and growth potential. Looking at prices alone won’t give a clear picture.
To illustrate, consider two tokens, A and B.
- A has 500,000 units in circulation and a price of $10. Its capitalization is $5 million.
- B has 20,000 units in circulation and a price of $100. Its total value is $2 million.
Looking at price only, you might think B is bigger than A. But, looking at the capitalization, it becomes clear that A is worth much more than B.
Cryptocurrencies are classified into three categories according to their total value:
- Large-cap: This class refers to any token valued at over $10 billion. They have demonstrated a good track record and have high liquidity, making it favorable for investors. Because of the ample liquidity, you can easily buy and sell these tokens on any centralized or decentralized exchange. Only a few tokens are currently in this category, including Bitcoin (BTC), Ethereum (ETH), Tether (USDT), USD Coin (USDC), Binance Coin (BNB), and Ripple (XRP).
- Mid-cap: This cohort refers to tokens with a total value of $1 billion to $10 billion. A few dozen tokens lie in this category, including well-known ones like Binance USD (BUSD), True USD (TUSD), Cardano (ADA), Bitcoin Cash (BCH), and Shiba Inu (SHIB).
- Small-cap: This cohort refers to tokens worth less than $1 billion. Most cryptocurrencies fall under this category. Small-cap coins are more vulnerable to market swings.
Factors Affecting Market Capitalization
The factors affecting the market cap of crypto include
Demand and Supply
The law of demand and supply applies to all assets. It states that prices rise when the demand for an asset goes up and falls when it goes down. Essentially, the price of a token directly correlates with the demand.
Bitcoin and Ethereum are the most popular cryptocurrencies and, as a result, have the highest market values. The former is worth over $500 billion, and the latter is worth around $200 billion (as of writing).
If a coin suddenly becomes popular, the value will increase sharply. That’s the aura of meme coins that have little utility but increase in value due to investor hype and demand. However, meme coins are volatile and could come down as fast as they went up. Large-cap tokens are more stable to hold.
Government regulations play a significant role in any token’s market value. If a specific token faces regulatory pushback, its value will likely fall because investors don’t like holding assets with uncertain futures. For instance, when the U.S. Securities and Exchange Commission (SEC) sued the company behind Ripple (XRP), the token dropped over 30% within a few days.
If a coin faces negative media coverage, the value will likely drop because controversies drive serious investors away. Investors follow crypto news outlets to see the latest happenings concerning any asset they hold and react swiftly to negative information.
We have explained market capitalization, how to calculate it, and the factors affecting this vital metric. At this point, you should understand this topic enough to explain it to another person.