What does Market Cap mean in crypto and why is it important?

3 months ago

What does Market Cap mean in crypto and why is it important?

Market cap is an abbreviation for market capitalization and the term is not only used in the crypto market. In the stock market it describes the market value of a publicly traded company’s outstanding shares. Similar to the stock market the market cap is used to measure and compare cryptocurrencies with each other. It is one of the most used terms in the media and many traders use the market cap as an indicator for possible growth of a cryptocurrency or a token.

Today we take a look at the very definition, its flaws and how the market cap can help you to understand the market a little bit better.

How is the Market Cap calculated?

In order to calculate a cryptocurrency’s market cap, one needs to multiply the current price with total supply that is also often called circulating supply. In short:

Market cap = price x total supply

The market cap is one of the most important metrics and one of the most important websites in the cryptocurrency space. It was dedicated from the very beginning in order to track market capitalization of Bitcoin and all other cryptocurrencies. Coinmarketcap became so big, that it was simply inevitable for many traders to get their market data from this provider. Over the years other platforms grew stronger and notable competitors are Coingecko and Coinpaprika.

While the formula to calculate the market cap is pretty simple the actual calculation depends on the data that is available to these providers. The quality of their assessment is only as good as the data they can get their hands on. If you compare the metrics across all platforms you will find that they are slightly different and that has a reason.

Is the Market Cap reliable?

One of the most difficult aspects is the reliability of the data that is provided by each exchange and to decide which exchange might be more weighted than others. There has been a lot of criticism in the past two years how providers like Coinmarketcap decide which data is to trust. Many journalists pointed out that many exchanges in overseas most likely to report fake volume making a correct calculation of the market cap almost impossible.

Since this debate started providers have promised to be more transparent and setting industry standards to make their own product more reliable and trustworthy. The fact that each provider varies slightly from the results of its competitors shows two things.

First and foremost, the data can be trusted. It isn’t really important if the market cap of Bitcoin is couple of million dollars more or less. It’s a 1 trillion-dollar asset anyway. And the second revelation is that if it comes down to smaller projects things get more difficult.

What does the market cap tell us about a cryptocurrency?

Aside from a measurement of how dominant a cryptocurrency is in the market; the market cap also indicates a lot about potential growth. A cryptocurrency with a small market cap might have a better chance to grow. However, these so-called small caps are way more volatile and carry even more risk, because they are largely illiquid.

The second group are the so-called mid caps. Mid caps are larger in size and tend to have already a working product and are likely listed on bigger exchanges. They tend to see less drastic volatility than the small caps. The growth potential of a mid cap is to make it in the big league. Their upside potential also comes with the risk to fail and fall back to become a small cap again.

Last but not least there are the large caps. These coins are highly liquid and traded all across the world on all mayor exchanges. Large caps are also more likely to be relevant in the derivatives markets. They offer a lot less volatility compared to the other two groups, which means they are a lot less likely to multiply their value. Please keep in mind that the crypto markets are highly volatile compared to other markets and take this assessment with a grain of salt. The daily volatility even of large caps is still beyond anything that traders and investors are used to in the traditional stock market.

  • Large Caps = Worth more than 10 billion US-Dollars
  • Mid Caps = Worth between 1 and 9 billion US-Dollars
  • Small Caps = Less than 1 billion US-Dollars

Is the Market Cap the most important stat?

When it comes down to measure dominance, yes, the market cap is the most important indicator. In other cases, it might make more sense to evaluate other data, like in- and out-flow of exchanges and the trading volume of an assets in the last 24 hours.

In general, there is not the stat or indicator, but each has its own merit. When it comes down to it, evaluate the situation that the market is currently in.

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