Publish Date
November 26, 2024
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Although there are many metrics that investors rely on but it is market cap that serves as a widely accepted starting point for gauging a cryptocurrency’s size, stability, and overall potential.
This article will cover everything you need to know about crypto market caps, including their definition, importance, impact on prices, differences from trading volume, and practical tips for using them in your investment strategy.
Crypto market cap is the total value of a cryptocurrency, calculated by multiplying its current price by the number of coins in circulation. It indicates a cryptocurrency’s size (overall value compared to others in the market), adoption (how widely it’s used or trusted), liquidity (how easily it can be bought or sold without affecting price), and market stability (resistance to large price swings), with higher market caps typically signaling wider acceptance and less volatility.
A high market cap usually means that the cryptocurrency is well-known, widely used, and trusted, making the coin more stable because its price is less likely to change dramatically with small trades.
This happens because a high-market-cap coin has many buyers and sellers, so it takes a large amount of buying or selling to significantly move the price.
💱 If a lot of people want to buy or sell, the coin’s price will only change a little at a time because there are enough trades happening to balance things out.
Hence, larger market cap crypto tend to attract big investors (e.g., banks and financial institutions), which can increase their reliability and trustworthiness.
Conversely, smaller market cap crypto are typically more volatile because fewer people are involved in the market, so even a small amount of buying or selling can cause a significant price change.
🪝If someone buys a large amount of a small market cap crypto, the price can rise sharply because there are fewer sellers willing to meet the demand at that price.
These crypto can offer high rewards (because their smaller size means they have more room to grow, and if the project succeeds, their prices can increase significantly) but come with higher risks, as their smaller size means they’re more susceptible to price manipulation and sudden drops.
When the price of a cryptocurrency increases, its market cap grows but if the price drops, the market cap shrinks.
However, changes in market cap can also result from a change in the total number of coins in circulation, not just the price.
For example, many cryptocurrencies have a fixed supply (e.g., Litecoin at 84 million), but some coins release new tokens over time, often through mining or staking (e.g., Ethereum has no fixed supply and continues to issue new coins as block rewards, and Dogecoin also has an unlimited supply with consistent mining rewards).
If more coins are created and added to circulation, the total supply increases. Even if the price stays the same, the market cap will go up because there are now more coins in the market, increasing the overall value.
💡 In 2023, researchers found that for over 7,000 cryptocurrencies, big price swings—both up and down—happen often and can be much larger than expected.
On the other hand, if the supply of coins decreases—like if coins are burned or taken out of circulation—the market cap could drop, even if the price remains unchanged.
So, market cap isn't just about how much a coin costs; it also depends on how many coins are available to be bought or sold.
Still, a coin’s price movements does influence investor sentiment, leading to more buying or selling, which in turn impacts its market cap.
💡 Bitcoin and Ethereum together comprise nearly 69% of the entire cryptocurrency market value, leaving the remaining 31% distributed among thousands of other cryptocurrencies
Generally, crypto with higher market caps tend to be more stable as these coins have a larger market presence and more liquidity; thus, they are less affected by sudden price changes.
Large-cap coins, like Bitcoin or Ethereum, often experience smaller price swings because they have many buyers and sellers, reducing the risk of manipulation.
On the other hand, smaller market cap coins are more volatile and can see big price changes with smaller trading volumes, making them riskier but with the potential for higher short-term gains.
Market cap and volume are two important metrics in the crypto world, but they measure different aspects.
Think of market cap like the overall value of a company—if a small local business has 1,000 shares worth $50 each, its market cap is $50,000.
Now imagine volume as the number of items moving off shelves in a store—if 100 products sell in a day, that's the trading "volume.”
While market cap gives a big-picture view of a cryptocurrency's value and potential, volume reveals its day-to-day activity, helping traders identify opportunities and assess liquidity and volatility.
When trading volume exceeds market cap, it can be a sign of high activity and strong interest in that cryptocurrency.
This often happens during periods of rapid price movement, where many traders are buying and selling the asset.
High volume can indicate that the market is active and liquid, meaning it’s easier to trade without affecting the price too much.
💡 In 2021, Dogecoin (DOGE) experienced a surge in trading volume that surpassed its market cap during a viral social media campaign. This heightened activity led to increased liquidity and a substantial rise in Dogecoin's price, benefiting early investors.
However, it can also be a red flag. Excessive volume compared to market cap can sometimes point to artificial activity, such as pump-and-dump schemes, where the price is artificially inflated and then rapidly sold off, leaving investors with losses.
💡 In 2020, Yam Finance (YAM) saw its trading volume exceed its market cap due to a sudden influx of interest. However, a critical code flaw led to a rapid collapse in value, resulting in significant losses for investors.
A "good" market cap depends on the type of investment you're looking for. Cryptocurrencies are often categorized into three groups based on their market cap:
Example: Bitcoin (BTC) with a market cap exceeding $1 trillion is the most widely recognized cryptocurrency, offering stability and trust.
Example: Chainlink (LINK), which powers decentralized oracles, and Polygon (MATIC), known for improving Ethereum's scalability, are both mid-cap coins with strong fundamentals and adoption.
Example: Render Token (RNDR), which focuses on decentralized GPU rendering, and Rarible (RARI), a token supporting NFT marketplaces, are low-cap coins that show promise but come with significant risks due to their smaller market presence.
Evaluating a good market cap is dependent on
1. Utility and use case of the coin
Understand the primary purpose of the coin or token. Does it serve a unique role in the blockchain ecosystem, or is it just a speculative asset?
Key indicators: Look for whitepapers, technical documentation, or use cases that explain how the coin contributes to its ecosystem. Utility drives demand, which impacts market cap.
💡 Binance Coin (BNB) began as a utility token in 2017 for reduced trading fees on the Binance exchange. Over time, its use cases expanded to powering Binance Smart Chain (BSC), enabling DeFi projects, and supporting payment systems. This ecosystem-driven utility helped BNB achieve a top-five market cap ranking.
2. Adoption and network effect
A larger number of users or integrations can increase a coin's value. Consider partnerships, on-chain activity, and ecosystem growth.
Key indicators: Track metrics like the number of wallet addresses, daily transactions, and partnerships with institutions or other projects. Strong network effects often correlate with sustained market cap growth.
💡 In 2021, El Salvador became the first country to adopt Bitcoin as legal tender. This move showcased the network effect of Bitcoin as more users, institutions, and governments began exploring its utility as a store of value and payment method.
3. Liquidity and trading volume
Ensure the coin has sufficient liquidity to support trading without extreme price fluctuations. Low liquidity can make even large-market-cap coins volatile.
Key indicators: Examine the coin's average daily trading volume on major exchanges. A healthy ratio of volume to market cap shows active participation in the market.
💡 The Terra ecosystem collapsed in 2022 due to low liquidity when UST lost its peg to the US dollar. This event highlighted the importance of robust liquidity in supporting price stability and protecting market cap.
4. Market cap in relation to circulating supply
Understand how much of the token supply is in circulation versus how much remains locked or unissued.
Key indicators: A high fully diluted market cap (FDMC) compared to the current market cap may indicate future dilution risks. Check token release schedules or vesting plans.
💡 Ripple's market cap soared in 2017 but faced scrutiny due to its large uncirculated supply locked in escrow. This created concerns about potential dilution and its effect on XRP's valuation.
5. Competitor comparison
Compare the market cap with competitors offering similar solutions. A lower market cap relative to peers may indicate undervaluation—or lack of adoption.
Key indicators: Analyze performance metrics like utility, adoption rate, and innovation compared to competing projects in the same niche.
💡 In 2021, BSC emerged as a low-fee alternative to Ethereum during the DeFi boom. Projects flocked to BSC due to its cost-efficiency, leading to a rapid rise in BNB’s market cap as it directly competed with Ethereum.
6. Development team and Ecosystem support
Assess the credibility, experience, and activity level of the development team and community contributors. A strong team fosters trust and sustained innovation.
Key indicators: Check GitHub repositories, developer activity, and the frequency of updates or partnerships. Active teams usually correlate with resilient market caps.
💡 Cardano gained credibility by emphasizing peer-reviewed research and a transparent roadmap. Despite slower development compared to rivals, its dedicated team and ecosystem pushed its market cap beyond $80.7 billion in 2021.
7. Macroeconomic factors and trends
Consider the broader economic landscape, including regulatory changes, crypto adoption trends, and global market conditions.
Key indicators: Monitor interest rates, inflation trends, and regulatory announcements that may affect overall demand for cryptocurrencies.
💡 When China banned crypto mining in mid-2021, Bitcoin’s hash rate plummeted, and the overall market cap lost over $1 trillion within months.
8. Your personal risk tolerance
Align your investment strategy with your risk tolerance. Larger market-cap coins (e.g., Bitcoin, Ethereum) are generally less volatile but may offer lower growth.
Key indicators: Evaluate the coin's historical volatility, market cap category (small, mid, large), and alignment with your portfolio diversification strategy.
💡 Shiba Inu's explosive growth in late 2021 saw its market cap reach $41 billion. However, its high volatility underscored the risks of speculative investments, serving as a cautionary tale for risk-averse investors.
Smart investment decisions go beyond market cap analysis. By evaluating factors like utility, development activity, and trading volume, you can uncover a project's true potential.
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FDV shows the potential value of a cryptocurrency if all tokens are in circulation. A high FDV with low adoption is a warning sign, suggesting limited long-term value. On the other hand, a low FDV with strong fundamentals indicates potential growth as more tokens are released.
Market cap reflects the total value of a cryptocurrency but doesn’t predict prices alone. To estimate price movements, consider market cap trends alongside factors like project development, market sentiment, and external economic conditions.
A balanced portfolio includes high-cap, mid-cap, and low-cap coins. High-cap coins provide stability and lower risk, mid-cap coins offer a mix of growth and risk, and low-cap coins have high growth potential but come with greater risk. This diversification helps manage risk and capture opportunities for both short- and long-term gains.
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