What does the market cap mean?

December 24, 2023
2 min read

Market capitalisation, or market cap in short, is a term used in all financial markets. It refers to the total value of a market or company, such as the total value of a publicly traded company or the total value of all issued Bitcoin. Investors can use the market cap to make investment decisions.

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 in the total number of coins and the supply in circulation (circulating supply). For example, there can ever be 21 million BTC in circulation, but not everything is available yet. Many BTC still need to be mined in the coming years.

A common misconception is confusing the price of a cryptocurrency with the market cap. A higher price of a cryptocurrency does not necessarily mean a higher market cap as the total circulating supply should also be considered.

The market cap is closely monitored by traders and investors. Various platforms, such as Coinmarketcap or Coingecko, display the market cap for a wide range of digital assets. Various media often make a comparison between the market cap of Bitcoin and that of large companies, to be able to put the size in perspective.

Reliability of the numbers

Since different crypto exchanges can have different prices, the exact market cap can never be determined with 100% certainty. Often an average price of different exchanges is used when calculating the market cap. The total supply can differ from moment to moment, depending on the specific cryptocurrency and what their supply looks like. Is the supply growing? Is it shrinking? Or does it always stay the same? In the first two cases, the market cap is therefore more difficult to calculate.

Why is a market cap important?

The market cap of a cryptocurrency can help in forming an investment strategy. Cryptocurrencies with a smaller market cap often have more room for growth, but also bring a higher risk and volatility with them.

Larger market caps are often more liquid and are widely traded worldwide. They are generally less volatile than the other categories, but the crypto market as a whole remains volatile compared to traditional markets.

The market cap can help in diversifying a portfolio by making the spreading of growth potential and risks more insightful. It is good to realise that the market cap is only part of the characteristics you need to consider when composing your portfolio. Economists argue that a market cap can never grow infinitely. Ultimately, there is only a certain amount of money in the whole world.

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

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