How the value of a crypto is calculated
Market cap (or market capitalisation) is a metric that measures the value of a cryptocurrency. You can calculate the market cap by multiplying a coin’s current market price with the total number of coins in circulation. It is imperative to look a project’s circulating supply and fully diluted value (or maximum supply). Some may have inflationary tokens (increasing supply) which could impact the value of holdings.
Calculating market cap
Market capitalisation= Current Price (per unit) X Total Supply (or number of circulating coins)
Market capitalisation is often used by both fundamental and technical analysts to offer a clear indicator of an asset’s acquired value. Many investors use a coin’s market cap to estimate its potential growth and calculate a risk-reward ratio.
It is necessary to note that while the market cap may provide insights about a project’s performance and size, it does not equal money inflow. This is a common mistake made by investors as the calculation of market capitalisation depends on price. However, even a minor variation in price can significantly alter the market cap.
Categorising market capitalisation
Large-cap: These coins make the safest investments due to their large market capitalisation, which means that billions are already invested. Some examples include Bitcoin, Ethereum, Binance Coin, Cardano, and Chainlink.
Mid-cap: We can categorise cryptocurrencies with a market cap of below $1Bn here. These coins are still popular and reliable, but they are riskier than large-cap coins.
Small-cap: These assets have a market cap of below $10M and are the riskiest assets. They have a high failure percentage and are not yet well-established projects. They tend to suffer from strong manipulation. Big market movers (whales) typically control the supply and price of cheaper coins.
Micro-cap: Market cap is miniscule in comparison to others $1M or less, these are often associated with “rug-pulls” where the price of a coin might be high to lure in unsuspecting investors. These should be avoided at all costs by novices entering crypto. Developing an understanding of market cap categorisation can assist an investor in creating a diversified portfolio. Balancing risk is an important part of investing and it is important to know how to limit one’s losses in the volatile market.
Disclaimer: Not financial advice – please do your own research before making any investments