Beginner
Lesson 18
3 min

What is market capitalisation (market cap) and why does it matter?

Market capitalisation is an indicator that measures and keeps track of the market value of a cryptocurrency.

  • Market cap is used as an indicator of the dominance and popularity of cryptocurrencies
  • Though this metric is widely used, more information before making trading decisions is recommended

In this lesson, you will learn the basics of market capitalisation.

In general, the higher the market cap of a cryptocurrency, the more dominant it is considered to be in the market. For this reason, market cap is often regarded as the single most important indicator for ranking cryptocurrencies.

How is Market Cap calculated?

The market cap of a cryptocurrency is determined by the current price multiplied by the circulating supply:


Market Cap = Price ( X times) Circulating Supply


Coinmarketcap is currently the most popular website to keep track of market cap of cryptocurrencies and to get an overview of how popular each currency is. It also offers the crypto world’s most popular index for all relevant financial metrics for cryptocurrencies.

On Coinmarketcap all prices are calculated by the volume-weighted average of all the prices from different exchanges. Bear in mind that it is important to monitor the circulating supply of a cryptocurrency - not the total supply. After all, it is only the circulating supply that is really available on the market right now.

The market cap of a cryptocurrency more or less reflects the popularity of a coin over a longer term.

Is market cap the best way to measure the popularity of a cryptocurrency?

Even though the market cap of a project is still seen as the most important indicator of relevancy, the concept behind this is often subject to criticism. The reason is that the market cap of a cryptocurrency more or less reflects the popularity of a coin over a longer term. 

Large-cap cryptocurrencies are generally considered to be safe crypto investments. These are companies with a market cap of more than $10 billion. Investing in coins with large market capitalisation is usually a conservative strategy. These coins are likely to be less volatile than other cryptocurrencies but still more volatile than traditional assets like stocks.

Mid-cap cryptos are more volatile but also have a lot more growth potential than large-cap cryptocurrencies.

Small-cap cryptocurrencies are often extremely volatile and considered a highly risky investment, albeit sometimes with a lot of potential (short-term) growth. However, be aware that they may also crash, literally from one minute to the next. 

As always with cryptocurrencies, we recommend to do thorough research before investing and consider all vital factors involved. For instance, market cap as a metric doesn’t say much about actual trading volumes over the last couple of hours. Therefore it makes sense to also check Coinmarketcap for the 24-hour trading volume that a cryptocurrency has on different exchanges over a reasonable period and other essential criteria before investing.

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FURTHER READING

BOOKS

  • Clay Collins - Crypto Market Cap: An In-Depth Review & Survey Of Emerging Alternatives

LINKS

Market Capitalization

What is Market Capitalization?

Learn: Cryptocurrency Market Cap: The Ultimate Investor’s Guide