What is market capitalization?

December 24, 2023
3 min read
coins

Market capitalization, or market cap in short, is a term used in all financial markets. The meaning is roughly the same in different markets. It refers to the total value or size of a market or company. For example, the total value of a publicly traded company. Or the total value of all Bitcoin issued. It is often used as an indicator of potential growth.

How is market cap calculated in crypto?

The market cap of a cryptocurrency is calculated by multiplying the current price of a cryptocurrency by its total circulating supply.

In short: market cap = price x total circulating supply

For many cryptocurrencies, there is a difference between the total number of coins and the current stock in circulation (circulating supply). For example, with Bitcoin, there is a total supply of 21 million BTC. But the circulating supply is lower: Many BTC have yet to be mined in the coming years.

Some altcoins are constantly reducing their circulating supply, for example by "burning" tokens with a burn mechanism to make the asset scarcer.

The market cap is closely watched by traders and investors. Several platforms, such as Coinmarketcap or Coingecko, show the market cap for a wide range of digital assets. Different media often make comparisons between Bitcoin's market cap and that of large companies to put the size in perspective.

Reliability of the numbers

Because different crypto exchanges may have different prices, it is never possible to say with 100 percent certainty what the exact market cap is. An average price of different exchanges is often used in the calculation of market cap. The total stock can vary, depending on the specific cryptocurrency and what their stock looks like. Is the supply increasing? Is it decreasing? Or does it always stay the same? If there is no set supply, calculating the market cap becomes increasingly difficult.

The growth potential of a cryptocurrency

Market cap not only provides insight into how dominant a cryptocurrency is in the market, but it can also give hints about its growth potential. Cryptos with a small market cap, also called "small caps," often have more room for growth, but they are also highly volatile and risky because of their low liquidity.

"Mid caps" are larger and usually already have a working product and listing on larger exchanges. They usually exhibit less volatility than small caps.

"Large caps" are highly liquid and are traded rapidly around the world. They generally have less volatility than the other categories, but the crypto market as a whole remains volatile compared to traditional markets.

Economists argue that a market cap can never grow infinitely. Ultimately, there is only a certain amount of money in the entire world. It is virtually impossible for all this money to end up in just one asset or company.

The information provided in our articles is intended solely for general informational purposes and does not constitute (financial) advice.

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