Market capitalization, commonly known as market cap, is an easy way to understand the stability of a cryptocurrency before an investor decides to invest in it. The more stable a cryptocurrency is, the more likely it is to invite more investors, as it has a proven record of stability.
Market capitalization is an indicator or metric that highlights the overall market value of a specific cryptocurrency. This can be found by multiplying the current value of a digital currency by the number of coins released in the market.
The volatility of the cryptocurrency market can disrupt the market trend of a cryptocurrency, making it unreliable for investors. Using market cap, the investor gets a deep view of the cryptocurrency of interest. Using an example of Bitcoin, which has a value of $34,113 and a market supply of 19,524,943 as per Coinmarketcap on October 20, 2023, To find the Market cap, you’ll multiply $34,113 by 19,524,943 to get $666,054,380,559
Diluted Market Capitalization
A diluted market capitalization calculates a cryptocurrency’s value with all its coins, both released and unreleased. Using Bitcoin as an example, it has 21 million coins with a current value of $34,113 as of October 2023. The diluted market cap will be 21,000,000*$34113=$716373000000.
Many investors tend to believe that the diluted market capitalization is the net worth of the crypto, which is very wrong. With the cryptocurrency market’s volatility, it is not advisable not to rely on future predictions. As the value of a cryptocurrency may fall, which may alter its total value. This may lead to token inflation, whereby market demand goes up and the value of the cryptocurrency drops.
When looking at diluted market capitalization, it is important to look at several factors that may have a huge impact on the trend of cryptocurrency in the future. A good investor should see how the cryptocurrency will be released to the market, whether it will be released in fractions, and the period that will be taken before the cryptocurrency is fully released into the market. Another thing to look for is how the circulation of the cryptocurrency will impact its staking.
Factors That Affect Market Capitalization
Several factors affect market capitalization, The demand and supply of a cryptocurrency affect the market cap. As demand goes up, the price of the cryptocurrency will increase, which will eventually lead to a rise in the market cap of the cryptocurrency. However, some cryptocurrencies are fixed, meaning that the demand-supply relationship will not affect the market supply. This is done to reduce market inflation.
The general status of the economy can affect the market cap of a cryptocurrency. A bull market, which is normally considered a healthy market, leads to a rise in the price and market cap of a cryptocurrency, while a bear market, which is a bad market, leads to a fall in the price and market cap of a cryptocurrency.
Market sentiment can change the market cap and price of a cryptocurrency. Positive reviews on the market can cause the market cap and price of a cryptocurrency to rise, while negative reviews like breaches and strict regulations can lead to a fall in the market cap and price of a cryptocurrency.
The trading volumes of a cryptocurrency can affect it. If a cryptocurrency is traded in large volumes per day, it can lead to a rise in the price of the cryptocurrency, which will lead to a rise in the market cap, while low trading volumes lead to a decline in both the price and the market cap.
Types of Market Capitalization
Market capitalization distinguishes different cryptocurrency companies by the value they have. Market caps usually range in three forms the large cap, mid cap, and small cap.
Large caps
These are companies that have assets that exceed $10 billion. These companies are usually stable and reliable, and they assure investors of returns when investing with them.
Mid caps
These are companies that have assets ranging from $2 billion to $10 billion. They are medium-sized companies that have a proven record that shows some stability and has the potential to rise. They have a higher risk compared to large caps, as many mid-caps are struggling to make their cryptocurrencies popular on the market, but they are still attractive to investors who love being part of a growth journey.
Small caps
These are companies that have assets ranging from $300 million to $2 billion. They are generally new to the market, with the majority of them being less than 2 years old. They are very volatile as they lack resources, like many large caps, due to their small size and the numbers they serve.
Using Market Capitalization as an Investment Strategy
Many investors opt to use market capitalization to understand the nature of a cryptocurrency before venturing into it. By using market capitalization, an investor can know the potential risks of a cryptocurrency; the greater the risk, the higher the returns expected. Some investors opt to invest in small caps since they’ll yield higher returns, which cannot be found in large caps.
Utilizing the market cap, investors get to choose whether they want to invest in cryptocurrencies that offer a chance of staking or not. These are normally found in large-cap cryptocurrencies. Market cap gives an investor the ability to know which type of cryptocurrency is more suitable: overrated and underrated cryptocurrencies.
The chance for an investor to do due diligence before investing in a cryptocurrency This gives investors the ability to decide on a cryptocurrency that has a promising future. This can help an investor avoid bearing losses.
Importance of Market Capitalization
Market caps give investors a chance to decide the best cryptocurrency to invest in. Market caps can analyze two different cryptocurrencies using different criteria, thus giving an investor the ability to select a profitable cryptocurrency to invest in.
Market caps show investors how stable or risky a cryptocurrency is before investing. The riskier the cryptocurrencies, the higher the rewards they offer. With this type of intelligence, an investor is more likely to trade in cryptocurrencies that will be profitable.
Crypto newbies can use market caps as tools for researching the best cryptocurrency to invest in; this will help them avoid getting false information that may lead to losses.
Conclusion
Market caps are there to offer more details on the cryptocurrencies and their respective companies to the general public before one invests. It is important to note that volatility changes the market cap over time; hence, without doing proper background research, one may experience losses instead of gaining profits. It is advisable not to rely on one source.
