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Market Cap is a direct and simple indicator to show the extent of digital currency trading. In fact, the market value, unlike the digital currency price, can determine the size and relative value of a digital currency for you. Most professional investors use the market cap index to check the value of buying a cryptocurrency and compare it with other digital currencies. This index helps you make smart investment decisions.
Market cap is determined based on various criteria and it can be used to check the liquidity of an asset, its value and the financial risk of investing in it.
If you want to have an attractive portfolio with low risk, you should pay attention to the market value. The market cap of the entire crypto market also includes the market value of cryptocurrencies such as Bitcoin, Ethereum, Litecoin and Ripple. In the continuation of this article, what is market cap? I will cover the market cap of the entire crypto market and other related explanations.
What is market value or market cap?
Market Cap or market value represents the cash value of an asset or company. In digital currencies, the market cap is equal to the total value of mined coins or tokens multiplied by its cash price, such as Rials or dollars. For example, a digital currency with 10 million coins, worth 10 dollars, will have a copy market equal to 100 million dollars.
This figure actually shows the size of the cryptocurrency market and the volume of its circulating capital. The market cap or market value determines for the buyer whether the cryptocurrency he is considering is a suitable option for investment or not!
Most experienced investors use the market cap or market value to evaluate the purchase value of a cryptocurrency and compare it to other currencies. Sites like Coinmarketcap use the market value criterion to rank digital currencies.
The importance of market cap in investment
Many experts believe that the market cap index can be misleading. The fear of investing in coins with low volume or more than the hope for coins with high market volume may make investors disappointed.
Market cap helps investors to understand their risk level in investing in a cryptocurrency. As the market cap gets bigger, the risk of investing in it decreases. Because these digital currencies have passed their growth period and have now reached minimal and relative stability. Also, manipulating their prices requires a lot of liquidity and they have relatively slow movements.
On the other hand, investing in digital currencies that have a smaller market value provides an opportunity for high-speed growth and Sharpe movement of the capital. New digital currencies with a smaller market value have more growth opportunities and are suitable investment options if you are a risk-taker and have a capitalist spirit.
On the one hand, they can earn a lot of profit, and on the other hand, they may suddenly lose their value. Market cap will give the investor an overview outside of the market hype. Especially with altcoins, this perspective outside of the hype can lead to informed and accurate decisions.
Many newbies invest in a cryptocurrency without considering its market value thinking that it is cheap and will reach a higher price. On the other hand, some others believe that the higher the price of a currency, the higher its value. Most of the time, both categories do not reach their desired profit or leave the market with a loss. Of course, it is important to note that market cap is not the only criterion for investing in digital currency, and other indicators such as diluted market value and daily trading volume should also be considered.
Read more: Learning to invest in digital currency
The importance of market cap in investment
Many experts believe that the market cap index can be misleading. The fear of investing in coins with low volume or more than the hope for coins with high market volume may make investors disappointed.
Market cap helps investors to understand their risk level in investing in a cryptocurrency. As the market cap gets bigger, the risk of investing in it decreases. Because these digital currencies have passed their growth period and have now reached minimal and relative stability. Also, manipulating their prices requires a lot of liquidity and they have relatively slow movements.
On the other hand, investing in digital currencies that have a smaller market value provides an opportunity for high-speed growth and Sharpe movement of the capital. New digital currencies with a smaller market value have more growth opportunities and are suitable investment options if you are a risk-taker and have a capitalist spirit.
On the one hand, they can earn a lot of profit, and on the other hand, they may suddenly lose their value. Market cap will give the investor an overview outside of the market hype. Especially with altcoins, this perspective outside of the hype can lead to informed and accurate decisions.
Many newbies invest in a cryptocurrency without considering its market value thinking that it is cheap and will reach a higher price. On the other hand, some others believe that the higher the price of a currency, the higher its value. Most of the time, both categories do not reach their desired profit or leave the market with a loss. Of course, it is important to note that market cap is not the only criterion for investing in digital currency, and other indicators such as diluted market value and daily trading volume should also be considered.
Factors affecting the market value or Market Cap
Carefully in the second part of the market cap calculation formula, you will get to know two important and influential factors.
Number of coins in circulation
Obviously, as the amount of coins in circulation increases, the market cap will also increase by the same amount. This amount depends on a concept called Tokenomics or token economy. The token economy or tokennomics of a project actually determines how tokens are produced and distributed. In addition, projects by processes such as token burning will lead to a decrease in the amount of coins in circulation and, subsequently, a decrease in the market cap.
price fluctuations
Another factor influencing the market value is the price change. The most important factor in price change is supply and demand of a digital currency. With the increase in popularity or the progress of the project, the demand will increase and will eventually lead to an increase in the price and market value. Also, news related to the project, changes in macroeconomic data such as buying and selling whales and interest rate changes are also other factors affecting the price of cryptocurrencies.
Token price change and market cap change
Although the market cap can show the value of a project, cryptocurrency or company, it should be known that this does not mean the entry of money into the market. This concept means that this amount of money is not necessarily circulating in digital currency transactions.
Because on the one hand, there is a possibility that there are lost or dead coins, and on the other hand, the market value depends a lot on the price of the cryptocurrency. Therefore, even a small change in the market will greatly affect the market cap.
In the previous example, imagine that each token is 10 dollars, the entry of a few million dollars can actually increase the price of each token to, for example, 15 dollars. This small change in token value will increase the market cap from $100 to $150 million.
The growth of the market volume does not mean the entry of 50 million dollars of new liquidity in the market, but only the increase of demand. For example, 5 million dollars caused the market value to increase by 50%.
What is liquidity in the market?
Market volume refers to the number of assets traded in a certain period; But liquidity refers to the rate of cryptocurrency trading regardless of the price. In simpler terms, changing a high-volume market requires a large amount of liquidity to change the balance between supply and demand. Therefore, if a whale intends to push the market in a certain direction, it will have a more difficult task in a situation where the market cap volume is high.
When sudden changes in the price of a token with market capitalization are time-consuming and difficult, it will make more sense to invest in it.
On the other hand, markets with a smaller market size are more affected by the sudden entry of a certain amount of liquidity; Therefore, investing in these markets will be more risky.
The total market cap of the crypto market (Total Market Cap)
The total market cap of the crypto market (Total Market Cap) includes the market information of a group of digital currencies including Bitcoin, Ripple, Ethereum and Litecoin. This indicator helps to have a more realistic and complete picture of how digital currencies are performing. As the market cap of the entire crypto market increases, it means that people’s attitude towards digital currencies has improved and the conditions for the growth of this market have been provided.
Another indicator to look at (especially altcoins) is the total number of digital currency tokens. Currencies such as Bitcoin have limited supply. For example, there are only 21 million units of BTC and its supply will decrease during the Bitcoin halving process. This is while an altcoin like Ripple has 1 billion units to supply. Ethereum also has no circulating supply and no total supply limit.
Coins with less supply will have a higher price due to more restrictions. Comparing Ripple and Bitcoin, regardless of all other factors such as blockchain technology, history of cryptocurrency, privacy and security of blockchain, etc. Ripple naturally has a much lower price. When looking at digital currencies, don’t just pay attention to the price of the coin.
For example, if Bitcoin Cash was $500 and Ripple was $4, don’t assume that Bitcoin Cash is a better cryptocurrency. The market size indicates how much the digital currency’s circulating capital is in the entire market and how much it has credibility among people.
Read more: How can blockchain security be increased?
Classification of types of market cap
In addition to market cap, it is used to measure the value of a coin for investment; It is also effective in the popularity of a digital currency in the long run. Below I will discuss the types of market cap or market value:
Mega-Cap
Megacap consists of two popular digital currencies in the market, Bitcoin and Ethereum. Currently, the market value of Bitcoin is 628 billion dollars and Ethereum is 289 billion dollars.
Large-Cap or Large-Cap
Digital currencies with higher market capitalization are mainly known as a safe haven or safe asset for investment. These cryptocurrencies usually have a strong backing and their total value is more than 10 billion dollars. Such cryptocurrencies are in the Large-Cap category. Investing in Large-Cap is considered prudent and has less volatility; However, compared to traditional assets, they are still volatile.
Medium-cap or average market value (Medium-Cap)
Digital currencies whose market cap or market value is between 1 and 10 billion dollars are in the category of medium map or average market value. Medium-Cap cryptocurrencies are known among investors as currencies with high risk and profit. For example, among the most famous cryptocurrencies with average market value, DAI, Litecoin, DogeCoin and SHIB can be mentioned.
Small cap or small market value (Small-Cap)
One of the riskiest digital currencies to invest in are small-cap digital currencies. The market cap of these cryptocurrencies is less than one billion dollars and they have more volatility. For example, Neo (NEO), eCash (XEC) and Bitcoin Gold (BITG) are among this category.
Daily trading volume index (Volume)
The volume of daily market transactions in 24 hours is another important indicator in measuring the market size of a digital currency. This means how much each digital currency has been converted and traded into dollars. The daily trading volume indicates the amount of money in circulation during a day in the market of a digital currency. The increase in the daily trading volume of a coin has a great impact on its current price and the increase in volatility during the day.
What is the maximum supply or diluted market value?
Maximum supply in digital currency or diluted market value refers to a state in the market where all tokens or coins of that particular cryptocurrency are in circulation. This measure is obtained by multiplying the current price of each coin by its maximum supply. For example, if the supply of a cryptocurrency is a maximum of 100 million coins and each coin has a value equal to 10 dollars, the diluted market value will be equal to 1 billion dollars.
It should be noted that the diluted market value or maximum supply may not necessarily reflect the true market value of a cryptocurrency. The entire supply of coins may not be in circulation due to factors such as team-held coins, locked tokens, or tokens that have not yet been mined or gradually released.
Professional investors consider both the current value and the diluted market value to gauge the growth potential of a cryptocurrency. Although diluted market capitalization is a theoretical measure and may not accurately reflect market reality, it is still important.
Introducing Coinmarketcap website
CoinMarketCap site is an active collection to obtain information about the market cap of important digital currencies in the world. This site has complete information about the top 100 tokens and coins in the world. CoinMarketCap website was launched in 2013.
In 2020, this website was bought by Binance Group. Currently, traders, reputable news publications and even governments use this site as a reliable source of the cryptocurrency market.
Coinmarketcap Persian site coinmarketcap.com is one of the famous sources for checking information such as market cap or market value, trading volume, circulating supply, related news and historical data, etc. is.
Digital currencies Bitcoin and Ethereum historically have the highest market volumes.
Market cap does not have a direct effect on the price and it is the opposite; Because the price is the factor that affects the market value or market cap. However, the high market value by attracting investors and increasing demand causes the price to increase.
