If you’ve just decided to dip a toe into the world of cryptocurrency, you’ve likely already been bombarded with a whole load of jargon. This can often make investing in cryptocurrency particularly intimidating.
One of the most important and prominent concepts that you need to understand is market capitalization, or market cap. This relates to the risk associated with investing in a particular cryptocurrency.
To learn more, take a look at the in-depth article below.
Market Capitalization Definition
The market capitalization (market cap) for a cryptocurrency such as Bitcoin is the total value of all of the Bitcoins that have ever been mined.
To calculate the market capitalization, you simply times the number of bitcoins in circulation by the current price of one bitcoin.
Market capitalization can be used to roughly gauge how volatile a certain asset will be.
Cryptocurrencies with a larger market capitalization are likely to be a much more stable investment than those with a smaller market capitalization.
It is important to understand that all cryptocurrencies are volatile. However, those with a larger market capitalization are more able to handle the market’s whims.
Whereas, one with a smaller market cap is more vulnerable to these whims, resulting in dramatic losses.
Why Is Market Capitalization So Important?
If you’re new to cryptocurrency investment, you likely measure a currency’s value using its price.
However, experienced investors use the concept of market capitalization to gain a more full understanding of the value of a certain currency.
Market capitalization is a key statistic when it comes to evaluating cryptocurrencies.
It can help the investor to understand the growth potential and the safety of an investment and withdraw funds from the crypto environment. For example, consider the situation below:
Let’s say that an investor is torn between investing in cryptocurrency A and cryptocurrency B. Cryptocurrency A has 300,000 coins in circulation.
Each one of the coins is worth $1.50. Cryptocurrency B has 150,000 coins in circulation. Each one of the coins is worth $2.50.
Then, the market capitalization for cryptocurrency A is $450,000. The market capitalization for cryptocurrency B is $375,000.
As such, even though the price of cryptocurrency B coins is higher, cryptocurrency A has significantly larger market capitalization.
How To Use Market Capitalization
To make more educated investment decisions, you need to understand how market capitalization is used to classify cryptocurrencies.
Cryptocurrencies can be placed into one of three categories according to their market capitalization. Check them out below.
Large-Cap
This category includes cryptocurrency giants like Bitcoin or Ethereum. To be in this category, a cryptocurrency must have a market capitalization of at least $10 billion. Even though all cryptocurrency investments are risky, these are considered relatively low risk.
They are considered to be low risk because of two things: they have a good track record in terms of growth, and they tend to have a higher level of liquidity.
This means that the cryptocurrency can handle a high volume of people cashing out without the price crashing.
Mid-Cap
A cryptocurrency is placed in the mid-cap category if it has a market capitalization between $1 billion and $10 billion. With these cryptocurrencies, investors tend to display some caution due to an increased risk.
But, they also tend to have a lot of untapped potential.
Small-Cap
Cryptocurrencies that are considered to be smapp cap will have a market capitalization of less than $1 billion.
These cryptocurrencies are particularly vulnerable to dramatic changes when things in the market shift. As such, they are considered a very risky investment.
Market Capitalization Of Top Ten Cryptocurrencies
Below, we’ve listed the top ten cryptocurrencies based on market capitalization. These were all true at the time of writing this article.
- Bitcoin (BTC) – $598.8 Billion
- Ethereum (ETH) – $231.1 Billion
- Tether (USDT) – $72.5 Billion
- USD Coin (USDC) – $54 Billion
- BNB (BNB) – $50 Billion
- Cardano (ADA) – $21 Billion
- XRP (XRP) – $19.5 Billion
- Binance USD (BUSD) – $18 Billion
- Solana (SOL) – $14.9 Billion
- Dogecoin (DOGE) – $11 Billion
Frequently Asked Questions
If you still have some burning questions regarding cryptocurrency and market capitalization, don’t worry!
Take a look at our answers to the most frequently asked questions below. You’ll be an expert in no time!
Is market capitalization the best way to measure the popularity of a certain cryptocurrency?
Generally speaking, market capitalization is perceived as the most important factor when it comes to the relevancy of a certain cryptocurrency.
However, this reliance on market capitalization has been criticized.
Whilst we do recommend using market capitalization to measure the safety of your investment options, it is also important to point out that market capitalization doesn’t tell you very much about recent trading values.
As such, before you invest, we recommend taking a look at the 24-hour trading volume that a cryptocurrency has.
In fact, you should be educating yourself on a number of essential criteria other than marketplace capitalization before investing.
What Is The Total Market Capitalization Of Cryptocurrency?
The total market capitalization of cryptocurrency currently stands at around $2.1 trillion. In 2021, the market cap dramatically increased from $965 billion to $2.6 trillion. Since then, it has decreased slightly.
Is It Better To Have A High Market Capitalization Or A Low Market Capitalization?
This depends on what you want to gain. Generally speaking, people prefer to invest in cryptocurrencies with a high market capitalization, because these are considered to be less risky.
However, small-cap currencies have a more aggressive growth potential.
What Does Volume Mean In Crypto?
When it comes to cryptocurrency, the term volume describes how much a certain cryptocurrency has traded over some period of time.
This is an important measure because it has a significant impact on the price of the cryptocurrency.
Conclusion
Cryptocurrencies have taken the world by storm over the last decade. However, whilst it might seem easy and simple to invest in certain cryptocurrencies, it is important that you are equipped with all of the knowledge necessary to make smart financial decisions.
We hope that this article has helped you to understand the importance of market capitalization.
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