What is market capitalization?

‘Market cap’ is a term you hear often in the cryptocurrency world. It’s an essential business metric that is determined by the stock market. In financial terms, market capitalization refers to how much a company is worth, based on the total market value of all outstanding shares.  In order to calculate a company’s market cap, you need to multiply the number of outstanding shares by the current market value of one share. Typically, companies are divided according to market capitalization:

  • Large-cap ($10 billion or more)
  • Mid-cap ($2 billion – $10 billion)
  • Small-cap ($300 million to $2 billion)

The equation used to calculate market capitalization in the stock market is:

Total Number of Shares x Current Price =+ Company Stock Market Capitalization

Why is market capitalization important in the cryptocurrency world?

Similarly to the business world, the market cap is a metric that indicates the size and market value of a cryptocurrency. The equation used to establish this metric is:

Current Market Price x Circulating Supply (Total number of coins in the market) = Crypto Market Cap

Market caps are used to determine the crypto currency’s value and compare it to other coins. In the financial world, market capitalization is important because just the price of a single share by itself is an inaccurate representation of the size of the company. Stock market analysts use market capitalization to make sensible investments.  Similarly, the cryptocurrency’s price can give an inaccurate measure of its total value.

How do you calculate a cryptocurrency’s market capitalization?

Let’s that Ripple’s (XRP) current price is $0.70 per coin with a total circulating supply of 30 billion.

$0.50 (price per coin) x 40,000,000,000 (total number of coins) = $21,000,000,000 (market cap)

Therefore, Ripple (XRP) has a market cap of 21 billion. Now let’s take Litecoin – let’s say the coin is worth $60 per coin and the total supply in circulation is 70 million.

$60 (price per coin) x 70,000,000,0000 (total number of coins) = $4,200,000,0000 (market cap)

However, even though the price of Litecoin is much higher, Ripple XRP has a significantly higher circulating supply. Therefore its total value is much higher in market capitalization.  In order for Litecoin to overtake XRP in market cap, the individual price of Litecoin would have to significantly increase, or the total supply would need to increase without the cryptocurrency’s price decreasing.

How do you measure it?

Generally, there are three metrics for calculating a cryptocurrency’s market capitalization:

  • Circulating supply – the number of coins currently circulating in the market available to the general public. This is the most commonly used metric.
  • Total supply – the total number of coins in existence which includes coins that are locked, reserved, or not sold on the public market.
  • Max supply – the total number of coins that can exist in the lifetime of the cryptocurrency

Very often, new crypto investors believe that market capitalization reflects the total amount of fiat currency invested in a crypto coin. This is an incorrect assumption because when the cryptocurrency is initially created, not all coins will certainly be acquired. Also, should demand increase for the cryptocurrency and people start buying it aggressively, then the price will increase, which subsequently increases the value of other tokens, which will raise the total market cap even further.

But should all investors decide to sell the cryptocurrency when the market cap reached a certain limit, then the price would rapidly decline due to diminishing demand, which creates a large difference between the market cap and the total amount of money invested.

Final thoughts

Cryptocurrency market capitalization is accurate and straightforward to understand the value of a crypto coin. A healthy market cap indicates that a cryptocurrency is strong, but whales holding coins can often mislead crypto. Investors should always evaluate the market cap as well as some other metrics before making an investment.