What Is Market Cap and Why Is It Essential to Cryptocurrencies?

By CryptoCatatic | Basic Crypto Stuff | 12 Sep 2022

When it comes to financial matters, almost anything has something to do with supply and demand. Depending on the bread’s demand, its price will change. This also happens in stocks and crypto cases.

And with so many changes in these industries, it is no wonder that users are starting to look for new ways of making their work easier. Regarding stocks and cryptocurrencies, some metrics need to be followed to know when it is best to invest. Market capitalization is one of the most important details to follow, and we will try to make it easier for you to understand what it is and how it works.

What is and how is market cap calculated?

Market capitalization (shortly market cap) is a term used in both stocks and crypto industries, and it usually shows the total value of a company’s shares of stock or the total value of a cryptocurrency in a fiat currency. Market cap has been used since the beginning of working with stocks; thus, it is often found in the two industries and often used by companies.

If you are wondering how the market cap is calculated, you should note that the process is quite simple. The market capitalization formula supposes multiplying the current share price by the total number of outstanding shares.

In crypto’s case, the market cap represents the total fiat value of all the coins that have been mined and entered the market, and it is calculated by multiplying the total amount of units by the price of a coin at that specific time. For example, if a cryptocurrency has a circulating supply of 500,000 coins and a coin’s value is 2,5$, the market cap will be $1,250,000.

What is market cap in crypto?

In the crypto industry, the market cap can show investors how stable a cryptocurrency is and how stable it will be long–term talking. Because cryptocurrencies are highly volatile, it is essential to analyze the tokenomics of a specific coin before deciding to invest.

Usually, coins with larger market caps are more likely to be stable over time, while those having smaller market caps are more likely to be affected by both small and big changes in the industry or any other event that might trigger a rise and fall of the market.

And when it comes to analyzing the market cap, it may seem complicated to do it yourself. This is why there are various platforms that can help you to do that. With a reliable crypto market cap comparison calculator you can even find the price of coin A if it was to have the market cap of coin B.

However, bear in mind that a cryptocurrency’s market cap can dramatically change due to the high volatility. Take Dogecoin’s example. The DOGE community has often met speculators talking about how investors should buy more, as the coin will reach $1. Doing a quick check, a user would realize that to reach $1, Dogecoin’s market cap should be around $133 billion, as DOGE has an exceptionally high number of units and massive annual inflation. Just imagine that, at the moment of writing, DOGE’s market cap is $8.4 billion. And by the time it rallies, Dogecoin might need a market cap higher than $133 billion.

How is market cap used in stocks?

When talking about the stock industry, market capitalization helps investors when analyzing the relative size of a company compared to another. Moreover, it measures a company’s worth on the market and how it will change over time. This way, investors can decide if a particular company is worth investing in to keep the investment safe. According to indeed.com, there are 6 levels of market cap company levels according to specific market value ranges:

  • Mega-cap companies, with a market value of $200 billion or more;
  • Large-cap companies, with a market value between $10 billion and $200 billion;
  • Mid-cap companies, with a market value between $2 billion and $10 billion;
  • Small–cap companies, with a market value between $300 million and $2 billion;
  • Micro–cap companies, with a market value between $50 million and $300 million;
  • Nano–cap companies, with a market value lower than $50.

After analyzing a company’s market cap, investors can see that a specific business is a safe place for their investment. For example, a Mega-cap company may be safer than a Nano–cap one. However, the bigger the market cap, the smaller the price movement will be.

How does the market cap show the potential of a crypto?

Whenever studying how a cryptocurrency acts on the market, a user may need to check more than just its price in fiat. Thus, along with other tokenomics, the market cap can talk more about how the coin’s value will change over time, assuring or reassuring a crypto enthusiast whether it is worth buying that cryptocurrency.

Market cap can drastically change due to some specific events in the crypto industry and not only. Nevertheless, it is a great way to decide if a cryptocurrency is worth investing in, as it shows its potential in the future.

When analyzing a coin’s tokenomics, combining the market cap with other metrics, such as the trading volume, is essential. This way, you will be able to have a better point of view regarding a cryptocurrency’s safety and volatility in time.

In conclusion

Market cap is a crucial metric for both crypto and stock industries, as it can show a cryptocurrency’s or a company’s value, therefore helping investors decide where to put their money.

When investing in stocks or crypto, research the specific asset thoroughly and ensure that your investment will not go to waste. You may check helpful tools that are there to make your work easier.

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