Market Cap Explained

What is market cap?

Definition

For a cryptocurrency like Bitcoin, market capitalization (or market cap) is the total value of all the coins that have been mined. It’s calculated by multiplying the number of coins in circulation by the current market price of a single coin.

Market capitalization (or market cap) is the total dollar value of all the shares of a company’s stock — or, in the case of Bitcoin or another cryptocurrency, of all the coins that have been mined. In crypto, market cap is calculated by multiplying the total number of coins that have been mined by the price of a single coin at any given time.

One way to think about market cap is as a rough gauge for how stable an asset is likely to be. (It’s important to note that even Bitcoin, crypto’s biggest market cap, still sees volatility.) But the same way a bigger ship can safely navigate heavy weather, a cryptocurrency with a much larger market cap is more likely to be a more stable investment than one with a much smaller market cap. Conversely digital currencies with smaller market caps are more susceptible to the whims of the market – and can see huge gains or dramatic losses in their wake.  

Sidenote: you might see references to “circulating supply” market cap or “fully diluted supply” market cap. With Bitcoin, those two numbers are the 18.5 million that have been mined (“circulating supply”) or you can use the 21 million that will eventually be mined (“fully diluted supply). Depending on their methodology, some observers will measure market cap using the currently circulating supply, while others will use the fully diluted number.

Why is market cap important?

Price is just one way to measure a cryptocurrency’s value. Investors use market cap to tell a more complete story and compare value across cryptocurrencies. As a key statistic, it can indicate the growth potential of a cryptocurrency and whether it is safe to buy, compared to others.

To demonstrate, let’s compare the market cap of two fictional cryptocurrencies. 

• If Cryptocurrency A has 400,000 coins in circulation and each coin is worth $1, it’s market cap is $400,000. 

• If Cryptocurrency B has 100,000 coins in circulation and each coin is worth $2, it’s market cap is $200,000.

• Even though the individual coin price of Cryptocurrency B is higher than Cryptocurrency A, Cryptocurrency A’s overall value is double Cryptocurrency B’s. 

Still, it’s also important to note that many cryptocurrencies’ market cap can swing dramatically due to their volatility.

What can you do with market cap?

Market cap allows you to compare the total value of one cryptocurrency with another so you can make more informed investment decisions. Cryptocurrencies are classified by their market cap into three categories:

• Large-cap cryptocurrencies, including Bitcoin and Ethereum, have a market cap of more than $10 billion. Investors consider them to be lower risk investments because they have a demonstrated track-record of growth and often have higher liquidity — meaning they can withstand a higher volume of people cashing out without the price being dramatically impacted.
• Mid-cap cryptocurrencies have market caps between $1 billion and $10 billion – they generally are considered to have more untapped potential upside but also higher risk. 
• Small-cap cryptocurrencies have a market cap of less than $1 billion and are most susceptible to dramatic swings based on market sentiment. 

Market cap is a useful metric for comparing the total value of cryptocurrencies, but market trends, a cryptocurrency’s stability, and your own financial situation all need to be considered when weighing the risks of any investment.