By Steve Burnett
If you’ve been around cryptocurrencies for a while, one of the terms you must have heard is coin market cap. Cryptocurrencies are ranked by market cap, that is the bigger the market cap, the higher up the cryptocurrency is on websites like Coin Market Cap.
It simply means market capitalization, and is an easy way to check how big a cryptocurrency is, just by looking at its ranking on a crypto ranking website. It is also easy to calculate. Simply multiply the current price of an asset by the number of the coin in circulation.
For example, for a crypto asset A with a current price of $0.5 and a circulation of 10 million coins, the market cap is $5 million. This is not to be confused with total market cap, which is the market cap for the entire market, which is currently at $1.18 trillion.
Calculating market cap isn’t always as straightforward as it sounds, because some crypto assets may show certain characteristics that make it difficult to do this. For instance, Ethereum’s total supply is said to be impossible to calculate, but this is a rare occurrence and you can calculate for most assets.
Note that assets with a larger total supply usually have a much lower price. For example, XRP with a total supply of 1 billion cannot have the same price as Bitcoin, which has a total supply of 19 million coins.
Another way to calculate market cap is using the maximum supply. This is the maximum number of a token or coin that will ever be available for use. Using this to calculate market cap can be tricky, since some altcoins don’t have a maximum supply.
Why is Coin Market Cap Important?
There are several metrics that crypto investors use in order to make informed investment decisions. the market cap of an asset is one of them. There are many things you can tell by just looking at the market cap of an asset.
However, there is debate on whether the metric is reliable for making investment decisions, because it hasn’t helped much in the traditional stock market. For cryptocurrencies however, market cap has proven to be a source of hard evidence on how assets are doing.
While they don’t give you the full picture, they do give a clear enough glimpse to be able to take the next step. One of the things you can learn from the market cap of a crypto asset is its growth potential. A crypto asset with a high market cap generally suggests that it has almost exhausted its price growth. This is where token burns come in.
Projects like Binance have intermittently burnt Binance coin (BNB) to reduce the circulating supply. This automatically reduces the market cap, giving it more room to grow. If you wish to invest in an altcoin, a good way to tell its potential is to look at the market cap, but in combination with other metrics of course.
The market cap however tells you how much room there is for the price to grow. If you see a token with a large supply and a very low price – a small fraction of a dollar, it is probably good to consider. However, a token with a large supply and a reasonably high price may be a sign to stay away.
This is why low-cap assets are generally more advisable to invest in than large-cap assets if you wish to make some quick profits. Assets like Bitcoin still have room to grow, but not at the same rate as a small altcoin that just came out today.
Conclusion
If you’re considering investing in crypto, market cap can be your friend. Combined with other metrics like technical and fundamental analysis, you’ll be able to make a reasonable investment decision on which assets to buy and which ones to avoid at any point in time.
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