Does Crypto Market Cap matter?

Will Crypto Markets Crash?

by DailyCryptoInfo 423 Views

Does Crypto Market Cap matter?

Will Crypto Markets Crash?

by DailyCryptoInfo 423 Views

Market cap doesn't really indicate the true potential of a coin. Personally, i only look at market cap on:

If it increases, the price of coins increase (not sure which but money is coming in to crypto). Vice versa if it decreases.

The true potential of a coin for me is determined on the use case it will be used upon. In this case, we're looking at ripple. Ripple is trying to replace an ancient system that apparently does trillions worth of $$$ every year using their token.


Market capitalization is a well-known metric for traditional securities, but has unique implications in crypto. Market capitalization is a measure of the value of a security. It usually consists of multiplying the amount of outstanding stock shares by the current stock price. In crypto, it’s defined as the circulating supply of tokens multiplied by current price. If a coin has 100 tokens outstanding and is trading for $10 a coin, it has a market cap of $1000. There are around 16.6 million bitcoins in existence, and the price is around $5600 at time of writing. Bitcoin’s market cap, therefore, is roughly $94 billion.

Traditionally, stocks and bonds have been analyzed via financial metrics and ratios. Measures like price-to-earnings ratio, earnings per share, the current ratio, earnings growth, and so on are used to examine stocks. However, crypto teams don’t publish financial statements, what metrics that do exist are all the more important Market cap provides a quick and easy check on how valuable a cryptocurrency is.

Market capitalisation may not be an accurate way to describe the total value of a crypto coin

As the price of a cryptocurrency goes up or down, its total value is typically described with reference to its market capitalisation.

In the case of a crypto such as Bitcoin, the market cap is calculated as follows: The total number of coins on issue, multiplied by their price.

But according to Julian Hosp — co-founder of cryptocurrency TenX — the metric has some serious limitations in determining the actual value of a digital coin.

In a commentary on the risks facing the crypto market for CNBC, Hosp explained his point as follows:

"If a cryptocurrency has a market cap of $1 billion, it doesn't mean that $1 billion has flown into that cryptocurrency," Hosp said.

"So, for a cryptocurrency to have a market cap of $1 billion, maybe only $50 million actually moved into the cryptocurrency."

"Therefore, if that coin collapsed completely, its market cap would go from $1 billion to zero, but investors would have actually only lost $50 million."

Does Crypto Market Cap matter?

So a given coin's market capitalisation is therefore heavily dependent on the number of coins on issue, which appears to be at the discretion of the coin's creators when they launch an Initial Coin Offering (ICO).

The ICO process differs somewhat to when a company lists on a stock exchange via an Initial Public Offering (IPO).

In that scenario, the sale of share is facilitated by an intermediary — typically an investment bank — who underwrite the sale.

The investment bank aims to price the shares at a level so the float is fully subscribed - and in doing so, that process also sets the company's market value.

Advocates of Bitcoin argue that part of its value proposition stems from the fact it has a finite supply of 21 million coins, which means those in circulation aren't just made up on a whim.

However, doubts still remain about how many of the Bitcoin mined so far — around 16 million — are actually in circulation.

More than 2.2 billion USDT tokens are supposedly in supply, which in theory means the same amount of US dollars have flowed into the currency to give it its value.

MarketCap, Is It Really Important?

what is this mysterious market capitalization? It is a total value of all coins, i.e. total number of coins multiplied by price of one coin. So for cryptocurrency with 1 mln coins 1$ each, market cap would be equal $1mln. Market cap, in other words, total value of cryptocurrency, and its price are not directly or inversely proportional — there is no correlation. Bitcoin, for example, has comparatively low number of coins in supply, but the highest price, so it has the largest market cap. At the same time, price can be low, but if there are a lot of coins in turnover, market cap is large — for example, Cardano: one coin equals $0,3 at the moment of writing this article, but total market cap is $10,296,832,356 with the 6th place in the top of market cap cryptocurrencies.

The main argument of market cap devotees is that the price of one share is not an indicator of a cryptocurrency overall value. It doesn’t tell us anything about the size or profitability of the company as a whole. That’s why it is useful to look at the market cap — you can see the crypto scale and value.

Does Crypto Market Cap matter?

The problem with market cap is that it’s quite easy to trick the system: create 100 bln of some coin, trade it on exchange for $1 (in calculating the market cap the last traded price is used) and you have cryptocurrency with $100 bln market cap. But this artificial increase of total price doesn’t add any real value — it’s still just number of virtual coins, that has no potential. The true value is determined by number of people who want to buy it. Also there are many coins where only small part of total supply is available for trading and is considered as market cap. So market cap can be easily changed by flowing more coins into the market — and, most likely, the price per coin will fall sharply. Will market cap advocates continue to insist on total value importance when coins they hold will be worth much less but hold large market cap?

Market capitalization may be a misleading metric. It doesn’t mean that it is always like that, but relying only on this factor may be disappointing. Market cap is one of cryptocurrency characteristics, that should be taken to attention when choosing what coin to buy, but should not be the main guide, or you may end up buying some unknown coin from the top-list, which market cap was artificially blown up to enormous scale. The point is you can’t pay attention only to market cap — it is too careless.

It doesn’t mean that market cap doesn’t matter at all, but often there is too much concentration on it, so other characteristics are eluding. The truth is, market cap alone doesn’t tell anything about coin’s true scale and profitability, as well as price per coin. When choosing a coin, all characteristics and their balance must be taken into account. And that’s not only market cap and price. Liquidity, for example, may be even more important than those two mentioned above — the possibility to buy or sell coin any time at fair price, and, what is more important, even large amount of traded coins won’t seriously affect the market. Daily traded volume is also a great indicator showing how much money being actually used and moved.

One more important aspect for the value of crypto is having some practical use. Many of altcoins that was launched in the last few years, are backed up by some technology, that can be actually implemented — for example, Ripple, that offers the solution for problem of interoperability in financial industry with comparatively low price of $1,14 but large market cap of $44,596,115,730 (ceding only to Bitcoin and Ethereum).

You can learn a lot about crypto just by checking market caps. First things first: Bitcoin is still the big dog in town. With roughly 55% of the total crypto market cap, it remains far and away the most valuable coin, roughly three times as valuable as Ethereum. There is a huge gap between Bitcoin and Ethereum, but also a large gap between Ethereum and third-place Ripple. There are still relatively few valuable cryptocurrencies. Only 12 coins have a total market cap of over $1 billion. It’s not uncommon for popular altcoins to have market caps of under $20 million. Most of crypto’s market cap remains tied up in Bitcoin and a few other big names.

A high or low market cap can reveal a coin that is resistant to volatility, or vulnerable. Coins with small market caps consequently rock more when big news hits the market, or “whales” (large buyers) take positions. That isn’t inherently surprising – the crypto markets are among the most volatile the world has ever seen. But holders of tokens with small market caps are at risk of being crushed by larger traders. If several whales conspire to sell at the same time, the price of a token can crash to nothing instantly.

See also: How to read crypto markets?

See also: What crypto market is best?