What is a crypto market cap – All you need to know!
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You might have heard or read somewhere about crypto market capitalizations? And know you wonder what it actually means? And why is it important for crypto traders and holders?
Don’t look any further because this guide will give you all the answers to what it means, and why you should pay attention to it.
In this guide you will learn:
- What are cryptocurrency market caps?
- The history behind cryptocurrency market caps
- Why do we want to use market caps?
- The cryptocurrency market is just a baby compared to the stock market
- And key conclusions
We have also added a bunch of good to know bits about each area and what does this mean bonus guide in the end that explains some of the commonly used terminologies and industry examples. All so you will get the most out of this guide.
What are cryptocurrency market caps?
So the answer to the question of what it means is that it is basically a tool used to give value to a cryptocurrency.
And also to compare it to other cryptocurrencies. Out of these two cryptos, which should I invest in, might be a suitable question. And potentially the market capitalisation could be one of many factors used to help you make that decision.
To find out how they are currently valued by the market and investors.
To calculate the total market capitalization of a cryptocurrency you multiply the number of coins (or tokens) available in the circulating supply times the market price of one coin.
The Cryptocurrency Market capitalization = Circulating supply x Price
The price is usually taken from the various exchanges that trade that specific cryptocurrency.
So if for example, Bitcoin was available to buy and sell on three different exchanges, let’s use Binance, Coinbase and OKEx as examples, then the average trading price of all three of those exchanges would represent the average trading price of 1 Bitcoin.
That means you use one whole Bitcoin, and any other cryptocurrency to determine the price and the cryptocurrency market cap.
Tips for crypto-traders
1 ) Sometimes the price can differ between different exchanges
It is after all people that buy and sell cryptocurrencies and we all might have different price targets that we accept.
And this opens up the opportunity to buy a cryptocurrency at a cheaper price at one exchange and selling it for a higher price at another exchange.
This is called Arbitrage trading. You could make some easy gains by doing this, but it comes with risks like low liquidity and overall market changes to that cryptocurrency.
2) Crypto capitalization is a much better instrument to use than Fiat price (USD, GBP, EUR).
During the bull run of 2017, it was very common for newcomers to the cryptocurrency space to use the price of a cryptocurrency in USD to determine how good of an investment opportunity it was.
So people were looking at for example XPR (Ripple’s cryptocurrency) and saw its potential because it was ‘only’ valued at $0.20 cent compared to Bitcoin that was valued around $3000 USD at that time.
So someone new to the concept of price and value might think that XRP could grow a lot by comparing the price of 1 XRP to 1 BTC (Bitcoin) by comparing their price in USD. But this argument doesn’t take into consideration that there are about 42 billion XRP in circulation and only 17 million BTCs.
Meaning that there are about 2470 times as many XRPs available compared to BTCs. Obviously then the price of 1 XRP should be much lower than 1 BTC.
The history behind market caps
We all want to compare cryptocurrencies against each other.
- As a way to rank them against each other,
- In terms of price and value.
- And so far the market cap has been one of many standard methods used for comparing cryptocurrencies.
By using the market cap of multiple cryptos you could easily get an overview of how they were valued by the market. If it wasn’t much that separated them then that could be seen that they were valued similarly.
But if the market cap was very different then you could try to find out why that was. Maybe one of them was either overvalued or the other was undervalued. Which meant that you could potentially use this to profit via long or short trading.
So with the crypto market capitalization, you could fairly easily compare two cryptocurrencies with each other. It is far from perfect, in fact, there are plenty of people questioning its usage for cryptocurrencies.
Because market cap is not something new and only used for cryptocurrencies. It has been a standardised way of valuing the stocks of a company. You get the market cap or market capitalisation by multiplying a company’s shares outstanding by the current market price of one share.
So for stocks, it has been a central value instrument for years, and it is commonly used by professionals in the field.
But like for cryptocurrencies, it is not a perfect all-round method to value a stock or its company to any great depth. You can’t determine how well a company is truly doing, or its fundamentals just by looking at its market cap.
But it gives you an indication of how it’s valued by the market compared to other companies and their stocks.
So you can use the cryptocurrency market capitalisation to group companies together, into different size groups for example. Small-sized – medium-sized – large-sized companies.
Good to know about cryptocurrency market capitalization
1 ) Market cap (market capitalization) has been used for years in the stock exchange market.
But it has sort of been shoehorned into the cryptocurrency market too.
Because there’s a lack of other good measurements to use, and the cryptocurrency market is extremely young and immature compared to the stock market.
Which has been around since the 16th century in some capacity? The modern stock market that we know today established around the 19th – 20th century.
2 ) We are still learning best how to use it
It might not be the perfect instrument to use all the time. It is a limited tool. And it should not be used for any greater analysis of how well a cryptocurrency is doing.
But it is useful to use for a quick comparison between different cryptocurrency projects. If there were, for example, two very similar cryptocurrency projects, then you could use their market cap to compare them and potentially find a good investment company.
If for example one had a much higher market cap compared to the other but they seemed to be as good or promising when compared otherwise then it might give you a signal that one was either undervalued or the other overvalued.
3 ) The price of a cryptocurrency and stock is driven by speculation
In today’s cryptocurrency market speculation drives the price more than any intrinsic value a cryptocurrency might have.
Some say that the current cryptocurrency market is only driven by speculation and greed since few cryptocurrencies give you any ROI back (Return of Investment). Compared to dividends in the stock market.
Meaning if you invest $1000 USD into Bitcoin or Ethereum (Ether), what do you get back for your investment? Right now nothing, other than speculating that the value of 1 BTC or 1 ETH will be higher in the future.
With stocks, you often get dividends back by holding stocks, which is a reward given out to all stockholders. Both the stock market and the cryptocurrency market are driven by speculation and greed, but since the cryptocurrency space is so young the current established measurements used for stocks might not suit cryptocurrencies as well.
And we need better measurements in the future, to truly determine the value of a cryptocurrency to another.
*** Note in the future Ethereum will move to PoS from PoW, then you can stake your ETH and in return get ETH back as a reward (learn more about staking here).
There is a need across the cryptocurrency community, from fans to private investors to so-called institutional investors to use measurements like a market cap to rank different cryptocurrencies with each other, determine their overall value.
And obviously we also would like to have a measurement that we could use to spot potential investment opportunities right?
If there was for example two very similar cryptocurrency projects that more or less had the same business offering.
And the teams were of similar talent, their capabilities, and technology were more or less the same but the market cap was very different.
Then that would tell us something, wouldn’t it? Perhaps we could conclude that was one overpriced by the market? Or perhaps the other one was undervalued, and they looked to be a smart investment opportunity.
It is a bit crazy to think that Bitcoin has only been around since 2009, Ethereum since 2015 and many other today popular cryptocurrencies after that. So this new emerging market is still so young and unexplored and undefined. So we are continuously learning and finding better ways to understand and define value.
And if you remember the stock market exchanges go as far back as 1531 in Antwerp, Belgium.
There are over 1400 different cryptocurrencies, and they are far from the same type of cryptocurrency. There are both different types of cryptocurrencies and then different classes of cryptocurrencies. Some are peer to peer currencies similar to Fiat currencies, like BTC, LTC, and NANO.
Others are utility tokens on blockchain platforms like ETH, VET, and NEO, then there are security tokens. The latter has been the focal point of many discussions in cryptocurrency communities for some time now.
And there are many unanswered questions to which cryptocurrencies would be defined as securities and what would it exactly mean if for example cryptocurrencies would be defined by the SEC in the U.S as a security? (to find out more about the difference read this guide)
There is something known as the Howey test which helps to define if something should be classified as a security or not. But many people question that this test could and should be used to define Bitcoin and other cryptocurrencies.
What we think is important to convey is that you need to remember how young and unregulated the cryptocurrency market still is, so what worked for the stock exchange market and stocks might not automatically work as well for the cryptocurrency market.
But you can use market capitalisation still as a method of analysing different cryptocurrencies to each other.
But if you want to invest in cryptocurrencies and find out which one represents a good investment opportunity then you need to go much further than just looking at the current market cap.
You should look into the team behind the cryptocurrency, the business case, the competition and what they so far have achieved.
Stock exchanges vs cryptocurrency exchanges overview
The three largest stock exchanges in the world are:
- New York Stock Exchange (the total market cap of the entire exchange in 2018 was $23.12 trillion USD)
- NASDAQ (the total market cap of the entire exchange in 2018 was $10.93 trillion USD)
- Tokyo Stock Exchange (the total market cap of the entire exchange in 2018 was $6.22 trillion USD)
And the three largest cryptocurrency exchanges in the world by trading volume are:
- Binance (with a 24 hour trading volume of $1.8 billion USD)
- OKEx (with a 24 hour trading volume of $1.7 billion USD)
- Bit-Z (with a 24 hour trading volume of $1.3 billion USD)
*** Note we have removed a few exchanges because of their reports of the high fake trading volume
Follow the market cap and prices here at Go CryptoWise
You can easily keep track of the current prices for all your favourite cryptocurrencies right here at our website – follow live prices here. You can also track the current market cap.
For example, right now Bitcoin’s current market cap is $140.80 Billion USD, with a trading price of one BTC at $7,954.76 USD. Follow the live price of Bitcoin here below.
A quick recap of useful terms:
- Dividend = Is a divided return to all shareholders from a company’s earnings
- An exchange = is a platform where buyers and sellers can meet and trade cryptocurrencies (or stocks) with each other.
- How to calculate the market cap of a cryptocurrency = Circulating supply (of a coin/stock) x Price
- Arbitrage trading = Taking advantage of differences in trading price at different platforms/exchanges
- Circulating supply = the number of stocks/coins that are currently circulating on the market and in the public’s hands
- Howey test = a test used by the SEC to define if something should be classified as ‘investment contracts’. And if so it needs to comply with the regulations that follow all so-called securities under the Securities Act of 1933 and the Securities Exchange Act of 1934.
The Howey test compiles of these questions:
1. It is an investment of money
2. There is an expectation of profits from the investment
3. The investment of money is in a common enterprise
4. Any profit comes from the efforts of a promoter or third party
Hopefully, you found this guide helpful, if you have any questions please leave a comment here below. If you want to find other guides on cryptocurrencies and blockchain go to our Guides section.
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- A guide to cryptocurrency markets
- HODL, DYOR, REKT the 41 cryptocurrency terms you need to know!
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My name is Per Englund and I’m a long-term fan and investor of Bitcoin and other cryptocurrencies. I’ve been around the space for a good few years, learning how it all works and to be a part of this engaging community.
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