What is Market Capitalization?
Market capitalization is the total monetary value of a cryptocurrency at a given time. It represents the amount of money currently invested in that asset and is calculated by multiplying the coin’s current price by the total number of tokens in circulation.
This metric is often used to gauge the relative size and perceived stability of a cryptocurrency. Just as a large ship weathers storms better than a small boat, cryptocurrencies with a higher market cap—like Bitcoin—tend to be seen as more stable.
Conversely, low-cap cryptos may experience more dramatic price swings, making them riskier but potentially more rewarding investments.
How is Market Capitalization Calculated?
Market capitalization is calculated using the formula:
Market Cap = Current Price x Circulating Supply
For example, with Bitcoin currently priced at $81,096 and a circulating supply of 18,933,737 BTC, the market cap would be:
81,096 × 18,933,737 = $1.535 trillion
It’s important to use the circulating supply—the coins actively in the market—rather than the total supply, which may include unreleased or burned tokens. This distinction is crucial for accurate valuation.
Categories of Market Cap
Cryptocurrencies are broadly classified into three categories based on their market cap:
Large-cap Cryptos: These are established cryptocurrencies with a market cap of over $10 billion. Often referred to as blue chip tokens, they tend to be more stable and less volatile (e.g: Bitcoin and Ethereum)
Mid-cap Cryptos: These have a market cap between $1 billion and $10 billion. They carry moderate risk and potential for growth, appealing to investors looking for a balance between stability and return.
Small-cap Cryptos: With a market cap of less than $1 billion, these cryptocurrencies are often new or lesser-known, offering high risk but also the potential for significant returns. They are known for their volatility.
Why the Market Capitalization is Important?
Price alone doesn’t show the full value of a cryptocurrency. Market capitalization gives a broader view by measuring both the price and circulating supply.
It helps investors assess the overall value of a crypto asset beyond its unit price. Here's why market cap matters more than token price:
Token A: 1,000,000 tokens in circulation × $0.50 = $500,000 market cap
Token B: 100,000 tokens in circulation × $2 = $200,000 market cap
Although Token B has a higher price per unit, Token A has a much larger market cap, making it the more valuable asset overall.
Larger market caps often suggest greater stability but lower growth potential. Smaller caps tend to be more volatile, carrying higher risk but possibly greater rewards.
Market cap is a core metric for comparing cryptocurrencies and avoiding the trap of judging value by price alone.
Limitations of Market Cap
Market capitalization is widely used, but it has notable limitations that can mislead investors if used alone:
Lost or Inaccessible Coins: Circulating supply may include coins permanently lost (e.g., due to lost keys or death). These still count toward market cap despite being untradeable.
Price Sensitivity in Low Liquidity: Low-liquidity tokens can see dramatic price swings from minor trades. A single purchase may spike the price and artificially inflate the market cap without reflecting real demand.
False Growth Potential: A cheap token isn’t necessarily a good investment. Comparing DOGE’s price to Ethereum’s, without accounting for DOGE’s vast supply, leads to unrealistic expectations.
Lack of Fundamental Insight: Market cap ranks assets by size, but not by innovation, use case, or technical strength.
Market cap is a useful starting point but should always be complemented by metrics like liquidity, volume, and fundamentals for sound analysis.
