What is Crypto Market Cap & how it’s calculated?
Crypto Market Cap(italization) is a method of ranking relative size of a cryptocurrency by multiplying last tradable Price by Circulating supply of a token or a coin.
Market Cap = Price * Circulating Supply
Common Misconception about Crypto Market Cap
Common misconception is that many believe that the market capitalization of a cryptocurrency defines the total ‘cash’ invested into that digital asset, which is utterly wrong and misleads newer investors and traders entering this market space.
As of today the cryptocurrency market cap is roughly hanging around $200,000,000,000 (Billion) — does that mean that there is a total of $200 Billion invested in this market today? Absolutely NOT!
Let’s imagine that Bitcoin is worth $5,000 , multiply that by current circulating supply of 17.7 Million and we get $88.5 Billion total market cap of Bitcoin. Now that does not mean that there is a total of $88.5 Billion ‘cash’ invested into Bitcoin.
Well, let’s look into it… As we all know, Bitcoin is a ‘mineable’ digital asset with total coin supply of 21 Million and 17.7 Million circulating supply as of today. Now let’s fast forward several years ahead. We have 18.7 Million circulating supply, times that by our $5,000 Bitcoin and we suddenly get a market cap of $93.5 Billion. So where did the $5 Billion come from? For purposes of this example we didn’t have a change in Bitcoin value, only thing that has changed is the circulating supply of Bitcoin. That same example can be used for virtually ANY cryptocurrency out there whether it’s Ethereum, XRP, Stellar, Cardano…
Another way to look at this…
Let’s say for purposes of this example that an investor decided to sell $1 Million worth of his Bitcoin on an exchange. He puts a market sell for 200 Bitcoin (valued at $5,000 each) and order goes out. Well, if there isn’t a buyer who has a BUY order set up for 200 or more Bitcoins at $5,000 — our investor is out of luck, because now he will have to work his way down the order book and aim to sell his Bitcoin at a lower price point because supply is outweighing demand in that scenario.
For the sake of this argument let’s now assume that there is a buyer willing to pay $5,000 per Bitcoin but the buyer after him is only willing to pay $4,990 per Bitcoin. Fine! Our investor sells his 200 Bitcoin for $1,000,000 and now price per Bitcoin drops to $4,990 — Now the market cap drops from $88.5 Billion to $88.323 Billion which is a $177 Million difference. “Hold on!” — many of you will say. “But you only took out $1 Million! How come the market dropped by nearly 177 times your sell order?” — Easy! Because Crypto Market Capitalization does NOT define the TOTAL amount of ‘cash’ invested into it.
Hence my examples above, you should now know that when you hear someone say that Bitcoin or any other digital asset cannot be valued at an ‘X’ price amount because that would make the market cap worth over a ‘trillion or quadrillion’ dollars, you’ll know not to pay any attention towards them. The argument of “there isn’t enough money in the world” for a digital asset to be worth an ‘X’ amount has been heard for years now in reference to Bitcoin. For years and years over people have been screaming off the top of the lungs that Bitcoin will never be worth $100 — $1,000 — $10,000 and now those same people are screaming that Bitcoin will never be worth $100,000 because that will make for an over $1.7 Trillion dollar market cap just for Bitcoin, but little do they know that if demand will outweigh supply, it will be worth $100,000 and more — same goes for any other digital asset.
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