Cryptocurrency market capitalization comprises a mathematical technique for finding out the value of a cryptocurrency. Some of us think that the price constitutes the value, but the truth is otherwise. For instance, if you are buying a sandwich for $20 which tastes no better than another sandwich of $10. Who knows, maybe the $10 that you pay extra might cost you the risk of food poisoning.
Prices may vary from time to time due to various reasons like news stories, Government actions, and exchanges that also play a major role in a price change. Also, the way that the investor thinks also plays a small role in the price variation.
Market capitalization means a measure of the value of the security. It is the current share price multiplied by the total number of existing shares. Simply put,
The market cap of a company = Total number of existing shares * Current price
Let us consider the following example for better understanding,
Let us assume Acoin currently sells $100.0, Bcoin currently sells $1.0, and Ccoin sells $200.0. There are a total of 10,000,000 Acoins, 1,000,000,000 Bcoins and 10,000,000 Ccoins.
Acoin market cap = 10,000,000 * $100.0 = $1,000,000,000
Bcoin market cap = 1,000,000,000 * $1.0 = $1,000,000,000
Ccoin market cap = 10,000,000 * $200.0 = $2,000,000,000
The value of Acoin and Bcoin are of the same value but Ccoin is twice the value of Acoin and Bcoin.
From the above information, we get to know the amount of risk involved in the investment. Stocks can be divided into three categories: small-cap, mid-cap, and large-cap. In large-cap companies, the risk involved for investors in low and small-cap companies contains much more risk. Snapshots of company’s or cryptocurrency groupings can be obtained by using a market cap. Similarly, it also gives you a figure of the value of the privacy coin space.
Bitcoin size vs Altcoin risk
Bitcoin holds the largest cryptocurrency market cap. It has a circulating supply of over 17,991,725 and a price of almost around $9,000.0.
Bitcoin market cap = 17,991,725 * $9,000.0 = $161925525000 approaximately.
Other crypto coins belonging to the list ranking around 100, generally holds a market cap of around $55,000,000. Investing in these other crypto coins could prove highly risky. The challenge is to find which among these crypto coins will bring more value.
Market manipulation is another important aspect of the cryptocurrency market capitalization. Small market caps expose themselves more to price manipulation compared to large market caps. Some make use of small market cap coins by controlling the total supply to generate a large price movement in a particular direction.
What do we not know from this information?
- Cryptocurrency market capitalization doesn’t provide us any future prediction of the price of the coins.
- It also doesn’t determine the future coin supply.
- Few cryptocurrencies cap the total supply of coins while others make am infinite supply.
- Market cap doesn’t tell us anything regarding the velocity or direction of the coin, like if the coin’s growth will increase or eventually decline.
Here is another main factor that influences the market cap. Some investors lose their wallets and some even lose the means to recover their crashed wallet. One source of lost coins are bugs in code. In some cases, hackers steal crypto rendering the user not being able to redeem the coins. Hence, an accurate calculation of the cryptocurrency market capitalization is:
Cryptocurrency market caps = (Total number of circulating coins – Dead coins) * current price
The market cap approach is a part of the fundamental analysis field of stock market investing. The main motive of fundamental analysis is to compute the value of the company the predict future rewards. It generally involves long-term thinking. On the other hand, the technical analysis concentrates on short term trends and price fluctuation. For example, if a user wants to invest in a cryptocurrency, they perform technical analysis on the cryptocurrency to check if its value skyrockets in a week or so. This is a good short term investment, unlike a market cap.
Limitations to using market cap come up when you notice that it is being used to analyze companies. Even so, cryptocurrency market capitalization offers techniques to provide long term perspectives. Users can invest boldly knowing that the corresponding cryptocurrency is successful in the future and remains valuable. So they can perform technical analysis from time to time to do short term investment and use fundamental analysis techniques like the market cap for doing long term investments.
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