The so-called “market capitalization” is something that applies as much to equity markets as to cryptocurrencies and blockchain projects. It is an indicator of the market value at the time of a given cryptocurrency or blockchain network.
Another important metric is “total market capitalization” (total market cap) for the entire cryptocurrency industry. In a way, this value can be used as an estimate of the cumulative value of the blockchain industry and cryptocurrencies.
Calculating the market capitalization of a cryptocurrency project is relatively simple. Although most enthusiasts compare the market capitalization of each project individually, it’s a good idea to have a more general perspective.
The total value of all cryptographic assets is much greater than just the values sums of Bitcoin or Ethereum, even though these are the two largest projects in terms of market capitalization when considered individually.
All major cryptocurrency data vendors and analysts provide the total market capitalization of cryptocurrencies, so it’s relatively easy to track this metric. But what does this mean and what can it tell us about the market? In another article summarized and adapted from Binance Academy, we will explain these concepts in more detail.
The market capitalization of cryptocurrencies…
Often designated “market cap”, the market capitalization is the market value at a given moment of a network of cryptocurrencies. It is a value obtained by multiplying the offer/supply in circulation of a cryptoactive by its unit price.
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For example, let’s assume that we have two networks, AnaCoin and BernardoCoin. AnaCoin has a total supply of 1. coins and all of them are in circulation. The BernardoCoin network is a “Proof of Work” type blockchain, where they currently exist 60.
coins in circulation, of a maximum supply of 60. coins. The current market price of AnaCoin is $60, while that of the BernardoCoin is $2. To know which currency has the highest market capitalization value (“market cap”), just follow the following formula:
Market Cap = supply in circulation X price
- Which means that the Market Cap of the AnaCoin network is $120. (1.10 x $50) and the Market Cap from the BernardoCoin network is $200.10 (100. x $2).
That is, even if a BernardoCoin coin is 20 times cheaper than an AanaCoin, the value of the BernardoCoin network is still is (now) bigger. This is why market capitalization is a better estimate of the value of a network than the simple price of the individual currency.
… and market capitalization total of cryptocurrencies
We have seen how to calculate the market capitalization of a given cryptocurrency. The total market capitalization (total market cap) represents the combined value of the total Bitcoin, altcoins, stablecoins, tokens and all other cryptoactives on the market. This metric is considered important as it indicates the size of the sector as a whole.
Of course, due to the relatively high volatility of the cryptocurrency markets, the values tend to change a little. During the first six and a half years of the existence of cryptocurrencies, the total market capitalization did not exceed 000 billion dollars. Since the most recent peak of 1200 billion in 1234, this value has fluctuated in the hundreds of thousands of millions.
Often, the comparison of different financial markets can be a futile effort. Different sectors attract different types of investors. Cryptocurrencies do not necessarily attract stockbrokers, traders of forex or precious metals investors. Cryptocurrencies represent a promising new asset class and should be treated as such.
On the other hand, making financial decisions based on the total market capitalization of cryptocurrencies can be dangerous for several reasons. The first step is to ensure a correct market assessment for each individual project; to do this, we take the supply value and multiply it by the unit price of the asset.
However, it can be difficult to find the correct supply information.
If this data is incorrect, any further calculations are automatically invalidated as well.
Furthermore, it is possible that the market capitalization value of some projects is manipulated.
Some projects do this to create a false sense of security and added value. Simply consulting the total market capitalization value without asking questions about what it really means can lead to bad financial decisions.
After all, the total market capitalization is just a number that represents the general market at any given time.
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It could be representing a total of nine numbers today, ten next week, and eight six months from now. It is just a “snapshot” (snapshot) of the cryptocurrency industry at a given time.
Final considerations
The market capitalization of cryptocurrencies is an essential metric that we should watch out for. It describes the valuation stream (in terms of estimated value) of the entire cryptocurrency industry. It can also be useful to distinguish what is being reported now and the potential diluted market capitalization of the future.
Still, it is important to consider other metrics as well. Market capitalization is just one piece of the puzzle. There are other aspects of the industry that should be researched before making any financial commitment.
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