Why does the total crypto market capitalization matter?
by Maryna Trifonova, Head of Content at Jax.Network
This month, the total market capitalization reached $2 trillion for the first time in the history of cryptocurrency. The market cap nearly doubled over the past two months, according to CoinGecko. What does this mean, and how can you use this information? Read the article to get your answers!
What is the market capitalization, and how is it calculated?
Market capitalization is the current market value of a cryptocurrency network. It’s also used as an indicator of the dominance and popularity of cryptocurrencies. So the higher the market cap of a certain cryptocurrency, the more dominant it is. In a nutshell, it helps to create the ranking of cryptocurrencies and determine the most valuable ones.
There’s a simple formula for calculating market capitalization. It goes as follows:
Market cap = circulating supply × price
First of all, we need to pay attention to the fact that here we use the circulating supply of a cryptocurrency, not total. Proof-of-Work currencies, like Bitcoin, have a set max supply of coins that are to be mined within a certain period. So, even though the max supply of Bitcoin is 21 million, the circulating supply is 18,684,093 at the moment of writing. According to our formula, we multiply the circulating supply by the price, which is $61,458.41, and get a $1,148,294,760,299 market cap. You see, there’s nothing complex about that.
The total market capitalization is the value of all the cryptocurrencies available on the market combined. It’s quite important for many people involved in the crypto business, as it indicates the size of the whole industry. It’s interesting to notice that the total market capitalization has never been so high as it’s right now. The previous all-time high of $770 billion was set in 2018 in the last bull run.
What is the point of ranking by market cap?
Now we already know what the market cap is and how it’s calculated, so let’s see why you need to know this kind of data. If you intend to become a trader or investor, it’s one of the basic notions you need to know. In general, market cap indicates the popularity of a particular coin and the level of risk associated with it. As a rule of thumb, people divide all cryptos into three categories:
- Large-cap cryptos are those that have more than $10 billion market capitalization. The examples are Bitcoin, Ethereum, Binance Coin, Ripple, etc. They are considered to be the safest and least profitable options for investments.
- Mid-cap cryptos have market caps between $1 billion and $10 billion. They are considered less risky than small-cap cryptos and more profitable than large-cap cryptos.
- Small-cap cryptos represent the coins with market caps lower than $1 billion. They bear the highest risk because they’re more likely to fail.
These categories are obviously just indicative of the dynamics in the crypto market and should be taken cautiously. In any case, due diligence over each project needs to be conducted. There is often some hype around projects that are doomed to fail due to bad tech or other issues.
It should also be noted that some people use market capitalization to make a comparative analysis with other industries. For example, the total crypto market cap is often compared to the market cap of precious metals and stocks. It helps to understand where this industry can go and how much it can grow within the years to come. As there’s no set way of measuring crypto and blockchain projects, so these comparisons may be pretty helpful.
Conclusion
Total crypto market capitalization is an important metric to know. It basically reflects the current state of the whole crypto market. However, it would be best if you didn’t forget that there are other metrics that you need to take into account. Market capitalization is only a tiny part of what is out there. But market cap is an excellent tool to start from.
Disclaimer: Our content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on our blog and wish to rely upon, whether for the purpose of making an investment decision or otherwise.
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