Currently, there are more than 5,000 digital currencies listed across different exchanges across the world. Despite the considerable number, the media tends to cover the cryptocurrencies with the largest market capitalization because they are familiar with investors.
We may be familiar with the term market capitalization, especially if you regularly follow business news, or you are an investor in the stock market. It is a recognized metric in conventional securities but has a unique connotation in cryptocurrencies.
In the stock market, market capitalization is the measure of a security’s value. Typically, it is arrived at by multiplying the outstanding stock shares by the prevailing market price. In the cryptocurrency market, the definition is substantially similar but with slight differences.
What is Cryptocurrency Market Cap?
In the digital currencies definition, market cap is defined as the circulating supply of cryptocurrencies multiplied by their current price. For instance, a particular cryptocurrency has 1,000 tokens outstanding, and its current market price is $10 a coin, then the market cap will be $10,000.
Market capitalization is very important, especially when choosing the type of coin you want to invest in. Like stock market capitalization, the cryptocurrency market cap provides meaningful insights into the level of risk inherent in holding a particular digital currency.
In this article, we’ll look at seven things everyone needs to know about cryptocurrency market capitalization, especially concerning investments.
1. Large-Caps are less Volatile
If you want to buy large-cap cryptos, then your investment may experience minimal growth. However, these cryptos are less volatile and safe. Therefore, while you may not make any quick gains, your investment will still make some slight conservative growth.
As an investor, you should always bear in mind that cryptocurrencies are more volatile than stock. So during rough markets, investors are likely to seek quality because they tend to adopt a risk-averse attitude.
2. Small Market Caps tend to be New Coins
Newly released digital coins are generally referred to as small-cap cryptocurrencies. Although they do not have a lot of history, they present enormous possibilities for capital appreciation, but at a higher risk.
The digital assets are likely to be overlooked by investors because they are quite volatile. Of course, there are outliers, but the general trend is that these cryptocurrencies present a lot of risk for the investor.
3. Small Market Caps are very Responsive
Due to their low market capitalization, small market caps are vulnerable to the whims of the market. Their market values can plummet to unimaginable lows in an instant. But because they offer excellent risk-return tradeoff, most people choose to invest in them. They can dramatically explode in value, bringing in excellent returns to investors.
4. Mid-Caps add Diversification
Mid-cap cryptos have a lower market capitalization than the large-cap cryptos. Although they are risky than the small-cap digital currencies, they add more diversification to your crypto portfolio. These coins are more established and have more growth potential because they are still increasing their utility or market – they haven’t reached their full potential.
Generally, mid-caps tend to perform well over a prolonged period, so having them in your portfolio is a good diversification measure.
5. Diversification of Cap Sizes is Essential
Investors intending to reap the best from the cryptocurrency ecosystem should have large-caps, middle-caps, and small-caps digital assets in their portfolio. Such diversification will allow you to maintain the higher returns of small caps, the stability of large caps, and the long-term gains of mid-caps
Having the right mix of these cryptocurrencies insulates investors from the inherent steep losses typical of the volatile crypto market. Investors need to evaluate prevailing economic conditions to determine the ideal allocation for their portfolio.
6. Crypto Market Capitalization isn’t Perfect
As I’ve already mentioned, there is a difference between the market capitalization of stocks and cryptocurrency market capitalization. While with stocks, it is easy to get an accurate figure of the shares in a company, with cryptocurrencies, we can’t give a precise number of the digital assets involved, or in circulation. Without these metrics, it is not possible to provide an accurate market capitalization of a cryptocurrency.
Crypto market caps have a problem in relaying the precise market value of digital currency. One unique problem lies in the definition of “circulating currency,” which is given a subjective meaning by coin ranking websites. For example, CoinMarketCap defines circulating currency as;
“Circulating supply is verified by our team through communication with the project’s team. We ask for details including but not limited to the initial distribution, private allocations, locked addresses, team-controlled addresses, and addresses containing portions of the supply allocated for future use.”
While CoinMarketCap gives us a glimpse of the rigorous and thorough process they use to determine the circulating currency, it cannot escape the minds of crypto investors that the website relies on the judgmental opinions of its project team. Users are left with no option but to trust the assessment of CoinMarketCap on the number of coins in circulation.
Another reason that makes cryptocurrency market cap imperfect is that some cryptos increase their token supply more quickly than others. It means that such cryptos can easily increase their market cap. For example, tokens generated through a slow mining process, such as Bitcoin, can’t be compared with Tether, which is mined instantly, if backers provide financial backing.
Therefore, since different cryptos issue tokens in different ways and at different rates, market cap is not a perfect metric for measuring the value of a digital coin.
7. Market Cap of Cryptocurrency is a Necessary but not Sufficient
While the cryptocurrency market cap is an important metric, it is not an adequate factor to consider when choosing a digital currency to invest in. If you want to buy crypto, you must thoroughly research the digital asset and try to ascertain the growth prospects of the asset.