Understand the “Market Cap” in just 3 minutes

In 2017, a study by the American bank JP Morgan revealed that the total amount of capital invested in cryptocurrencies between 2009 and the end of 2017 was around 6 billion dollars. At the time of these lines, the total capitalization is close to 1,000 billion dollars. This capitalization was itself over $3 trillion less than a year ago (November 2021) at the height of the bull run.

But behind these stratospheric figures, what exactly are we talking about? What is the purpose of the Market Cap in crypto? We explain it to you in less than 3 minutes.

What exactly is “market cap”?

In cryptocurrency as in financial markets, a “Market Cap” (market capitalization) corresponds to the following formula:

Total market capitalization = The price of the asset (here cryptocurrency) x the number of tokens in circulation

NB: It is possible to consult in real time the ranking of the main cryptocurrencies as well as the total market capitalization. The reference in this area remains the “coinmarketcap” site.

How to interpret the market cap?

There is an important distinction that must be made to fully understand what market cap means. We cannot confuse the total amount of cryptocurrency with the total amount of cryptocurrency in circulation. For example, we know that there will eventually be 21 million Bitcoins while currently there are approximately 19 million Bitcoins in circulation. This mechanically affects the calculation of market capitalization.

If the calculation is based on 21 million Bitcoins, then we will speak of “fully diluted market cap”. The formula will be as follows:

Fully diluted market capitalization = the current value of the cryptocurrency x the total quantity of this cryptocurrency

With this variant, you therefore understand that cryptocurrencies created with several hundred billion tokens (like Shiba and its more than 500 billion tokens), can theoretically never reach a huge value unless a burning mechanism is put in place. .

What is it used for ?

For private and professional investors, the capitalization of a cryptocurrency is a fundamental data. It is usually analyzed to determine the popularity of cryptocurrency and its place in the cryptosphere. For example, and unsurprisingly, Bitcoin has been the cryptocurrency with the largest capitalization since its inception, far ahead of Ethereum.

Read also Cardano (ADA): 5 fundamental points that you absolutely must know before thinking about investing in ADA

Behind this number comparison and ranking, there is also the question of price variation. Indeed, Bitcoin or Ethereum are behemoths (more than 50% of the entire crypto market). Their variation alone is enough to tip the entire market (altcoins) one way or the other.

Another lesson, the issue of volatility. A “heavyweight” cryptocurrency like Ethereum will experience much less marked and violent variations than “small” cryptocurrencies capitalized at less than a billion dollars. This also results in the risk incurred for the investor in the event of extreme volatility (more potential gain for increased risk).

Conclusion: an essential indicator of the crypto ecosystem

The market cap is a primary indicator to get an idea of ​​the place of a cryptocurrency in the ecosystem and perceive its potential.

However, the market cap cannot be the only tool observed by an investor. This tool cannot be summed up as an indicator of the popularity of cryptocurrencies. Indeed, a cryptocurrency can hold a very high capitalization, but suffer from a strong lack of liquidity. Other indicators must be used in addition. This can be the trading volume or even analyzing the centralization of the asset to best invest in the crypto universe.

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