A cryptocurrency’s market cap is a crucial metric to consider when making trading decisions

This article will help you understand the basics of market capitalization — the formal term for market cap — and explain how it applies to the world of cryptocurrency. It will also help you determine if this metric is worth considering before trading cryptocurrency.

Let’s start by defining market cap.

What Is Market Capitalization?

Traditionally, market capitalization refers to a publicly traded company’s worth or its equity value. It’s determined by multiplying a company’s current stock price per share by the number of shares that are outstanding.

Market cap is an indicator of how the market values a company and represents the potential value of the company — not its total assets, sales, profit, or some other financial measure. (For example, startups can be hemorrhaging money and still have a high market cap.)

Market cap also gives a quick snapshot of the company’s size and value in relation to other companies. The terms “small-, mid-, and large-cap” refer to companies or investment funds specializing in companies of a certain size.

Investors often make assumptions based on a company’s market cap. For example, small-cap companies may be viewed as a riskier investment with a chance of outsized rewards, whereas large-cap companies may be seen as stable and offering a modest — but dependable — return.

Investors can use market cap to help them maintain a well-balanced portfolio. But what does this have to do with cryptocurrency and crypto market cap? Do things work the same? Well, not exactly.

What Is Market Cap in Crypto?

Because cryptocurrencies are relatively new, they have some characteristics that seem more akin to the world of stock investing than traditional fiat currencies. But they are, in fact, currencies in their own right.

Crypto market cap is derived from a similar formula as that of a traditional company market cap: current price per unit of the crypto times the number of units in circulation (a bit more on this detail later). The total is considered a crypto’s market cap.

For example, Ethereum (ETH) recently was priced at $1,014.64 per Ether, with 121.35 million coins in circulation. Multiplying the two numbers gives a market cap for Ethereum of $123.13 billion.

It is, therefore, possible to divvy up cryptocurrencies into small-, mid-, and large-cap buckets based on their overall market cap. Some crypto traders define over $10 billion as large-cap; mid-cap between $1 and $10 billion; and small-cap as under $1 billion.

But, unlike a company’s market cap, a cryptocurrency’s market cap implies nothing about ownership. It tells us only the total value of all coins, as with any other currency in circulation.

Crypto market cap can differ in another way from company market cap.

Recall that a company’s market cap is calculated based on the share price multiplied by the number of outstanding shares. If a company buys back its stock, that can affect its market cap, as can issuing new shares.

For example, when a company buys its stock, it can increase its earnings-per-share, which, in turn, may help drive up its share price. This can also increase the company’s overall market cap.

Some cryptocurrencies have a potentially unlimited supply because new coins can be mined at any time. As new coins are added, the number in circulation will increase. So its market cap may change.

Others, such as Bitcoin, have a maximum total supply that has not yet been reached.

With cryptocurrencies that have a future upper limit, some calculate market cap based only on the number of coins or tokens currently in circulation (circulating supply). Others may calculate it based on the ultimate fixed number that will one day be reached (fully diluted supply).

With an understanding of crypto market cap in place, let's dive deeper into why it matters.

Why Is a Crypto’s Market Cap Important?

We’ve seen how market cap matters to investors of publicly traded companies, but it also matters to the companies themselves. A better market cap can help companies attract business (a bigger business may be more stable and experienced) and more favorable lending rates.

But for crypto, market cap is a little different.

While it undeniably measures a crypto’s total current value, it may say more about a crypto’s popularity. A popular crypto may mean more community support and may imply more relative reliability or even stability.

Here is where you can see a parallel to stock-driven market cap.

Just as some investors view a large-cap company as a safer investment, so too will some view  large-cap crypto. And as some investors might look at a small-cap company as riskier but with greater growth potential, so might a crypto investor see a small-cap crypto.

This is sometimes referred to as a “weighted market cap strategy.”

Weighted Market Cap Crypto Strategy

The weighted market cap crypto strategy approach assumes that a balanced portfolio is better than an all-eggs-in-one-basket approach. Crypto traders using this strategy will buy different types of crypto based on their market cap.

But how do you decide how much of each crypto to buy? That’s where the “weighting” in “weighted market cap strategy” comes in.

First, you would compare the total market cap of the cryptocurrencies you’re interested in. Then, you would buy them proportionately.

Let’s say you’re interested in three coins: A, B, and C. A has a market cap of $1,000. B has a market cap of $500. And C has a market cap of $250. You have $100 to invest. A weighted market cap strategy would call for buying $57 of A, $29 of B, and $14 of C. Here’s how the math works: coins A, B, and C have a combined market cap of $1,750 ($1,000 + $500 + $250). Coin A has a $1,000 market cap, which represents ~57% of the total combined market cap of all three coins, while Coin B has ~28.5%, and so on.

In theory, this keeps more money in popular assets and smaller amounts in relative unknowns that could easily soar or crash. But remember that a crypto’s market cap is never a surefire indicator of stability, growth potential, or other future aspects of its performance.

Other Aspects to Consider When Choosing Crypto

In addition to its market cap, here are other characteristics of a cryptocurrency to help you determine whether or not you should buy it.

Current Price and Price History

Lower-priced cryptocurrencies may have the potential to move more in percentage terms because the change seems to be small.

Consider a cryptocurrency worth $50,000 moving to $75,000. Seems huge, right? What about that same asset moving from $.005 to $.01? Hardly noticeable.

But the second asset has, in fact, doubled — providing a 100% return. The pricier asset has increased by only half that.

Circulation Supply and Maximum Supply

Remember our Bitcoin example earlier of a cryptocurrency that had a maximum supply? If a crypto has a very low circulating supply but a high maximum supply, you’ll want to know more about how new coins or tokens enter circulation.

A flood of new coins or tokens entering circulation can sometimes have adverse effects on cryptocurrency prices.

Volatility

All cryptocurrencies can be volatile, but there are some more volatile than others. Examine the cryptocurrency’s price history over time.

However, keep in mind that volatility isn’t necessarily always bad. Some investment vehicles actually rely on it. Just make sure you understand your objectives and the tools you’re using when you evaluate a cryptocurrency’s volatility.

Trading Volume

Lots of trading volume can be a good thing. The more volume a cryptocurrency has, the more difficult it is to manipulate. Because of this, you may want to exercise caution if a cryptocurrency has very low trading volumes.

Bringing it all Together

So what is market cap in crypto? It’s an important component that tells you a cryptocurrency’s overall value. It can help you evaluate it and even devise a crypto strategy. But it’s only a piece of the puzzle.

How do you put the entire puzzle together?

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