Many think that the market cap in crypto only reflects the funds invested in a project. But, supply and capitalization are concepts derived from traditional finance that help measure the value of a crypto project.
Market capitalization is an indicator of dominance and popularity. Thus, the more capitalization, the more market presence a cryptocurrency has.
Market Cap calculation
In the traditional market, market capitalization is obtained by multiplying the value of a company’s share by the total number of shares owned.
To calculate the market cap on crypto, the number of coins in circulation is multiplied by their current price.
Market Cap and Fully Diluted Market Cap
The calculation method we have just explained is called the Circulating Market Cap because it only considers the number of crypto in circulation that we can use.
As you know, there are deflationary cryptocurrencies. That is those cryptocurrencies for which we know the total issuance —such as the 21 million Bitcoin (BTC) that will be issued.
Deflationary crypto assets allow the calculation of another concept you should know: the diluted market cap. This is obtained by multiplying the total issue of a cryptocurrency by its current price.
Cryptocurrencies like Ethereum (ETH) that do not have a total supply but instead have infinite issuance do not allow us to calculate diluted market capitalization.
Regulation of the circulating supply
On the Bitcoin network, every certain number of blocks halves the amount of BTC that miners receive as rewards for mining. The name of this mechanism is ‘halving,’ which controls the total supply of bitcoins.
Although Ethereum does not respond to the Bitcoin halving logic, it does have inflation control mechanisms.
Recentemente, Ethereum moved to the Proof of Stake (PoS) algorithm. The native currencies of PoS networks have multiple uses, such as paying for dApps services and Staking.
Holders of these crypto-assets can also become validators and receive rewards for the new blocks. This is how the PoS networks add new coins to the circulating supply.
In turn, PoS cryptocurrency holders can vote to decide the number of rewards each validator receives and regulate the circulating supply by increasing or decreasing the portion of new coins issued.
Where to check the Crypto Market Cap?
One of the most popular websites to follow the crypto market cap is Coinmarketcap. Coinmarketcap calculates the volume-weighted average of cryptocurrency prices on different exchanges to reflect the data.
Based on these metrics, Coinmarketcap provides a market capitalization ranking of some 21,700 cryptocurrencies [November 2022]. BTC, ETH, and Tether (USDT) are the three leading crypto assets based on capitalization.
Another popular market capitalization website is CoinGecko. However, the latter use other sources of information that differ from those used by Coinmarketcap so the data may vary a bit.
It’s imperative to remember that the market cap can be as volatile as the price in crypto and fluctuate even hourly.
Purpose of the Market Cap
With the market cap, any trader or investor can know the evolution of a cryptocurrency. Thus, beyond its price, they can measure the value and acceptance it has had in the community to get an idea of the project’s future.
Classification of cryptocurrencies according to their capitalization
BTC and other cryptos have a market capitalization greater than 10 billion dollars. For many, these crypto-assets are usually much safer investments and, in a certain way, less volatile.
Projects with a capitalization of less than $10 billion are mid-cap cryptocurrencies. They are much more volatile than large-cap crypto but have much greater growth potential.
Small-cap crypto generally are new projects on the market. They tend to be highly volatile and are hazardous investments. Just as they can sink from one moment to another, they can multiply their value exponentially.
Market cap issues
However, market capitalization should not be the cornerstone determining whether a project is a good investment. Unfortunately, some project leaders have manipulated the Market Capitalization of their crypto.
Thus, even if a project has very few users, its developers or those who lead the organization and have significant amounts of said currency can increase the number of coins in circulation by moving their funds to exchanges.
These movements can increase market capitalization without implying a greater use of the cryptocurrency or token.
Another aspect to consider is coins that cannot be moved anymore. Circulation figures assume that all currencies circulated at some point are part of the total usable cryptocurrency. However, lost coins in misplaced private keys or damaged devices can detract from the entire value of the crypto asset.
So, in 2018, Nic Carter and Ryan Selkis presented a mechanism to measure the Real Value of the market. This metric proposes to discount the coins that will not be able to move again, offering an accurate price calculation, unlike the crypto market cap.
However, market capitalization is still crucial for many investors to enter crypto projects.
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