To start with, Cap(s) is an informal term for Market Capitalization which is a metric for measuring the real value of a crypto asset. However, the market capitalization of a crypto asset is the multiplication of the total number of the asset and the current price of the asset (Price of the token x total token). Usually, there are various forms of capitalization in the market. There is the “Circulating Cap,” which is measured by the total number of coins in circulation currently, and there is the “Total Cap,” which is measured by the maximum supply of the token.
Usually, market capitalization is categorized into three, namely small-cap, mid-cap, and large-cap. Before diving into the explanation of these three categories, it is essential to define a concept called the FDV or Fully Diluted Value. FDV is the total market cap based on all the tokens that can ever be created. By implication, the three categories of market cap are references to measure the size of the circulating cap relative to other crypto assets.
Using crypto data websites like CoinMarketCap shows the list of tokens with the category they fall under, and this is basically to measure their popularity and dominance in the crypto market.
For a better understanding of all these three categories of market cap, it is essential to understand the concept of trading volume and supply in crypto, including the difference between the total, circulating, and max supply of a crypto asset.
As mentioned earlier, the objective of this guide is to demystify the concept of market cap and the three categories of market cap in the crypto space. Also, this guide will reveal the risks and rewards involved in dealing with each category. But before diving into all those, let us open this guide by talking about what determines the price of crypto assets.
What Determines the Price of Crypto Assets?
Just like the value of fiat currencies (EUR, USD, etc.) is different, there is an obvious difference in the value of each asset in the crypto space. The two basic things that drive the price and value of crypto assets in the space are Demand and Supply. According to the law of supply and demand, the less the supply, the more the demand.
Take Bitcoin, Ethereum, and Ripple, for example. There is a huge difference in their prices, and the question is why? The basic answer is that the supply varies. The total supply of bitcoin is less than Ethereum’s, and the total supply of Ethereum is less than that of Ripple. You may want to ask, “What about altcoins with low supply and low prices as well?” That is where demand comes in. Bitcoin, being the flagship asset in the crypto space, had gained much traction in the mainstream that people are investing huge fiat money in it, hence, the reason for its price gains.
What is the Meaning of Small Cap, Mid Cap, and Large Cap in the Crypto Space?
Actually, these three classifications are only existing in the crypto space alone, but they are common terms existing in the traditional markets, especially the stock markets. Coming from the perspective of the stock market, the difference between small-cap and large-cap is like comparing penny stocks to the stocks of big companies like Microsoft, Tesla, Apple, and so on. Likewise, in the crypto space, we can say it is the comparison of the market cap of [new launched] altcoins to the flagship asset in the crypto space, Bitcoin.
In the following sections, we will uncover how coins are categorized into large-cap, mid-cap, and small-cap.
- Large Cap
Crypto assets with a large cap are considered to be assets with a market cap of over $10 billion US dollars. Using that estimate, only the top 10 tokens according to CoinMarketCap are classified as large-cap tokens as of this writing, and they include Bitcoin (BTC, $401.98 billion), Ethereum (ETH, $146.12 billion), Tether (USDT, $66.83 billion), USD Coin (USDC, $55.91 billion), Binance Coin (BNB, $38.33 billion), Ripple (XRP, $17.55 billion), Binance USD (BUSD, $17.38 billion), Cardano (ADA, $16.67 billion), Solana (SOL, $13.50 billion), Dogecoin (DOGE, $9.83 billion).
These crypto-assets have strong security and have established a long-term proven track record. Also, these assets can be considered the major players in the crypto market.
- Mid Cap
Crypto assets in the mid-cap are classified to be tokens with a market cap of around $10 billion US dollars down to $1 billion US dollars. Also, the crypto assets are considered to be well established but still in their expansion stage, hence there are possibilities of rapid growth in the future.
As of this writing, tokens under this category begin from the 11th token on the list of tokens on CoinMarketCap (Polkadot, DOT, $7.82 billion) down to the 46th token (KuCoin token, KCS, $1.06 billion). Other popular tokens within this range include DAI, Shiba Inu, Litecoin, Algorand, Bitcoin Cash, Stellar, and others.
- Small Cap
Crypto Assets under this category are tokens with a market cap within the range of $1 billion and more than $100 million. Without mincing words, these projects don’t have much track record in the crypto space, and their resources are small compared to the other top projects with the mid and large-cap.
Also read:Due to the size and age of the projects, the risk involved in investing in these projects is higher than the mid and large-cap projects. Oftentimes, these projects with low caps have a huge tendency to fail but also, on the contrary, they can be amazing gems to invest in because of their great potential for growth if researched properly.
- Micro Cap
You might perhaps be asking about the crypto assets with a market cap lower than $100 million. This is the category they fall under. Crypto assets with a micro-cap are considered riskier even than projects with a small-cap. When compared with the stock markets, you can say they are penny stocks. Oftentimes, they are projects or assets launched by some anonymous person or group.
Comparing Small Caps, Mid Caps, and High Caps
The classification of crypto assets based on their market capitalization is basically classifying them based on their risk factor and popularity. This shows the extent of risk an investor will deal with when investing in crypto projects. On a general note, the underlying factors to be considered in any crypto project is the liquidity, volatility, responsiveness, and core values.
In this section, this guide will analyze the different categories of tokens based on market cap according to their responsiveness, volatility, liquidity, and risk involved.
- Large Caps: Low Risk, Less Volatility, and High Liquidity
Speaking about the crypto space generally, the asset class is speculative, and it is advised that investors should risk what they can afford to lose. However, with that said, crypto-assets with a large market cap are considered the least risky assets of all the three classifications of assets based on market cap.
Another thing to note is that investing in assets with a large market cap will not generate a substantial return but rather slow conservative growth. Also, assets with large market cap are known to have high liquidity, which means that almost every crypto exchange has those tokens listed on their trading platform with high daily trading volume. One thing to know about liquidity in the crypto space is that high liquidity helps an investor to get in and out of a token’s market with ease. It is possible to place a huge buy or sell order and be sure your order will be filled immediately.
Crypto assets with large market caps are also known to be less volatile, which means that it is quite difficult for their price to move vehemently in either direction compared with the mid and the low caps. However, based on the nature of the crypto market, they are still more volatile than traditional assets like stocks.
- Mid Caps: Good Liquidity, Great Growth Potential, and Medium Risk
Crypto assets that are classified as mid-cap involved higher risks and are more volatile than large caps. Also, these tokens are not as established as large caps, hence they are considered tokens in their expansion phase with their utility still increasing. This means that most of the tokens in the mid-cap category have not yet reached their full growth potential and this means their potential for growth is higher than the tokens with a large-cap.
Generally, mid-cap tokens often perform much better in the long run, and including them in your investment portfolio can be a great way to diversify your investment. However, it is not all these tokens have the huge potential to grow to be large-cap tokens.
- Low Caps: Low Liquidity, High Volatility, and High Risk
In the crypto market, the level of risk is generally decided by the volatility of the assets, which is first a basic inherent feature of every asset in the market. However, it varies from asset to asset. For tokens with a small market cap, there is a higher chance of experiencing more volatility than with tokens with a higher market cap. This is because low cap tokens are still in their tender stage and are susceptible to extreme price fluctuations.
Just a single buy or sell order can cause a rapid shift in the price movement of the tokens. So, mainly because of the extreme rise and fall in the price action of the tokens within a short period of time, your investment in these low cap tokens is considered very risky.
Also, low cap tokens are more susceptible to market sentiments, and since most of these tokens are still new in the market with no proven track record, any media sentiments either positive or negative can easily cause a huge shift for the token.
Another issue with low cap tokens is the low liquidities in their markets. This means that these tokens are often not listed on major crypto exchanges, hence they have low trading volume. This lack of trading volume and unavailability on major crypto exchanges make it difficult to buy assets or even liquidate your positions, especially when a huge sum is involved.
Quick Recap and Summary
High Cap tokens: these are tokens with a huge market cap, and any investment in these assets will yield minimal return. However, it is safer to invest in this category than others because of their proven track record in the crypto markets.
Mid Cap token: this category is perhaps the most interesting of all the three categories. While this category comes with a level of risk due to volatility, they are great potential for growth, and the risk is minimal compared to the low cap tokens.
Small-Cap tokens: even though this category of tokens has the potential to explode (as short as over the night) to give investors a huge return on investment, the level of risk involved due to the volatility is way higher than the large and mid-cap tokens. Also, this category is considered to be less liquid since they are not popular, and are not listed on major crypto exchanges. This means that it will be more difficult to exchange the token, especially when in greater measure.
With all these said about the market capitalization of crypto assets, which category of the cap should an investor invest in?
Diversify Your Crypto Portfolio
Having established that not all coins and tokens in the crypto space are not the same at least based on their market capitalization. But beyond the market cap, each of these crypto projects has its intrinsic values and features, and most of them are developed to solve a specific problem with different use cases in various industries. Another thing to put into consideration is that all these three categories of market cap do not have the same growth rate, and there is also a difference in their risk-reward ratio. So when investing in the crypto space, it is always better to diversify your investment portfolio with the proper mix of the three classes.
Here is the advantage of diversifying your portfolio:
1. Risk Reduction and,
2. Getting the Best from the Crypto Markets
However, investors who are serious about the crypto space and are concerned about the safety of their investments are recommended to have over 70% of the large-cap tokens. Of course, the leading assets are Bitcoin and Ethereum, and it might be a great option to consider for the large-cap tokens. After learning, reading, and researching the viability and the potential for growth of mid-cap tokens, you can consider adding them to your portfolio like Tezos, Chain Link, and so on.
Market Cap Size is Not the Only Essential Metric for Measurement
Here is a very strong turning point in this guide. Picking tokens and projects worthy of your investments based on the overall market cap of the project should not be your priority. Even though the market cap is a very good metric used in evaluating the dominance and popularity of a crypto asset, it is not the only metric needed, especially when investing in the token. Some other metrics and factors need to be considered before making a financial decision in the crypto space, like the identity and integrity of the core team behind the project, the value proposition of the project, and the current technical and fundamental analysis of the market.
One of the major factors that affect the market cap of crypto projects is the token/coin supply. Often time, most centralized projects have their way of burning tokens and manipulating the specifications of the total supply just to increase their ranking on CoinMarketCap.
It cannot be overemphasized for investors to carry out in-depth and thorough research before buying into a crypto project. The least you can do to safeguard your investment is to check the track record of the token and also consider what people are saying about it. However, do not be carried away by the bubble hype around projects with no adequate value proposition. Another thing you want to consider is the daily trading volume of the token, as most tokens with small and mid-caps are easily manipulated.
On a concluding note, beware of crypto promotions (irrespective of the social media channel, be it Twitter or YouTube) that are promising huge returns on investment or moon shots. The basic and generic understanding every crypto investor must have is that the asset class called cryptocurrency is highly speculative, and you need to Do Your Own Research (DYOR) to mitigate the risks involved.
Conclusion
This guide has been so comprehensive in explaining the various categories of tokens according to their cap size and also in differentiating them. while a lot has been mentioned in the guide, it is quite essential to issue a disclaimer that this guide and every information within is compiled solely for educational purposes. They are not in any way meant to give financial advice to investors. So, any financial decision taken on account of the content of this guide is solely the readers’ responsibility.
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