What Does it Mean and is it Important?
So you’ve just started investing in cryptocurrencies? Welcome aboard! As a beginner, there are all kinds of ways to measure the value and cost of a coin that you’ve heard of. Lots of beginners look at the price of a coin or token, see that it’s under $1.00 and think:
“Wow! That could be the next Bitcoin! That could go up to $14,000!”
But…can it? Keep reading to learn more about the valuation of a particular crypto asset and how to assess the real cost of a coin.
What is Coin Market Cap?
We’ll begin with a quick definition from Investopedia:
“Market capitalization refers to the total dollar market value of a company’s outstanding
shares. Commonly referred to as “market cap,” it is calculated by multiplying a
company’s shares outstanding by the current market price of one share. The investment
community uses this figure to determine a company’s size, as opposed to using sales or
total asset figures.”
“Market cap” is just a shortened form of “market capitalization,” and it’s one of the predominant
indicators for investors when evaluating a company. In this case, we’re taking the same
principles used with traditional companies and utilizing them in the crypto asset markets.
To understand this more easily, we’ll use the similarities between publicly traded companies and
certain cryptocurrencies. You can think of individual coins/tokens as being like a share in a
company. There are a specific number of coins available for circulation (some cryptocurrencies
have more added over time, some do coin “burns” to fend off inflation) and depending on the
demand for these coins the price will fluctuate. Coin market capitalization measures the overall
value of a specific currency in the markets.
What does that mean? All you need to do to find the total amount of “outstanding shares” and
multiply that by the price per “share.”
Market Capitalization = # of outstanding shares x price per share
Okay great, now let’s bring that into the crypto world. Instead of “shares,” we’re looking at total
number of coins. The important part when determining market capitalization is to remember the
term “outstanding” in reference to the coins (basically the cryptocurrency equivalent to a
Coin Market Capitalization = # of outstanding coins x price per coin
The total number of “outstanding” coins is not always going to be the same as the coins in
circulation. Between certain initial coin offerings (ICO’s) allocating a specific amount of coins to
be locked up until a later date, lost wallet keys (and therefore coins), and “whales” (investors
holding a substantial portion of a specific currency), the number of coins actually in circulation is
rather tricky to know for certain. Because of this, just keep in mind that these are estimated
Let’s Look at Some Examples
Bitcoin (BTC) – $198,885,837,392 USD
At the time of writing this, Bitcoin (BTC) was trading at $11,830.60USD/1BTC. If we look at the
circulating supply to the right, we can use that to determine the market capitalization. By using
the formula above, we simply plug in the numbers.
Coin Market Capitalization = $11,830.60 x 16,811,137 BTC
Bitcoin (BTC) is currently the largest cryptocurrency trading by market capitalization, and it has
been for quite some time, but what about a “small cap” cryptocurrency?
AudioCoin (ADC) – $18,864,638 USD
Unlike Bitcoin (BTC), AudioCoin (ADC) is what’s considered a “small cap” or “micro cap” coin, meaning the current market capitalization of the currency is less than $25million. Again, we’ll use the same simple formula below:
Coin Market Capitalization = $0.22298 x 846,035,134 ADC
What’s the Significance?
Okay great, so we calculated the market cap, but what does that really mean for me as an
investor? Well, quite a bit.
When deciding on what crypto assets to purchase or invest in, market cap is going to give us
some important information. Since coin market cap measures the amount of value attributed to
a specific asset, it’s also able to give investors an idea of how volatile the asset is likely to be
and what future projections can look like.
Take Bitcoin (BTC) for example: BTC has the single largest market cap of any crypto asset and
because of that, the swings in pricing tends to be less volatile than smaller market cap coins.
Granted, the percentage change is still massive compared to traditional securities like stocks
and FOREX trading, but still more stable than something like AudioCoin (ADC).
If you look at the two screen captures above taken from CoinMarketCap.com, you’ll see that
AudioCoin (ADC) has had a 24 hour change of 38.97%, not too bad of a return for a day.
Now scroll back up and look at Bitcoin’s (BTC) 24 hour change in price: a much more modest
6.37% increase. While not bad by any stretch of the imagination, that increase is significantly
less than that of the much smaller market cap coins.
As an investor, this means that you need to evaluate what you’re looking for in an initial
investment, and how much risk you’re willing to tolerate. For a massive market cap coin like
Bitcoin (BTC) or Ethereum (ETH), changes tend to be less severe, but also don’t offer incredibly
high returns like small market cap coins due to how much room they have for growth.
Another quick example after scrolling through the first page of Coin Market Cap:
In the last 24 hours alone, Coimatic 2.0 (CTIC2) has returned 414.18%. Yes, you read that
correctly. That’s not a 4% return, or a 14% return, or even a 40% return, it’s a 414.18% return!
That kind of return on investment is absolutely insane by traditional securities metrics, but isn’t
at all unheard of in the crypto markets. Clearly, you can see why those looking into small cap
coins are interested quick, explosive growth. If you were to invest in a coin with a much higher
market cap than Coimatic 2.0’s tiny $296,992, then in order to achieve a similar return, the coin
would have to surpass massive staples in the market like Ethereum and Bitcoin (pretty unlikely
in most cases).
However, there is also the other side of this coin (no pun intended):
Yellow Token (YEL) is a perfect example of what’s on the other side: risk. These low market cap
tokens like YEL can also see tremendous volatility for the worse. In the last 24 hours alone,
Yellow Token (YEL) has lost 68.53% of it’s value.
You’ll definitely need a strong stomach to invest in the small market cap tokens/coins, but they
offer incredible opportunities for growth.
So we’ve covered what coin market capitalization is and how to calculate it, but what are the
important aspects of this calculation and what should investors be using it for?
● Getting a rough approximation of how volatile a cryptocurrency is likely to be relevant to
other coins/tokens on the market.
● As an approximate indicator for the possibility of explosive growth of an asset in the
● Comparing and contrasting different assets trading at different prices, since they will both
differ in circulating coins/tokens.
● As an indicator to help predict whether assets are actually “expensive” or “afforadable”
relative to the circulating supply and not relative to other asset prices.