When I go to coinmarketcap why are the cryptocurrencies listed in order of market cap? Why aren’t they listed in order of price!? What on earth is the cryptocurrency market cap?
Understanding the cryptocurrency market cap is a fundamental step towards investing safely into blockchain technology. You must understand what exactly the market cap represents so you truly understand the overall value of the cryptocurrency that you want to invest in.
What is cryptocurrency market cap?
Simply put, the cryptocurrency market cap is the overall valuation of the circulating supply of the coins. It is calculated therefore by multiplying the current price per coin by the circulating supply.
Price vs Market Cap
You must take the market cap into account and not just the price per coin when investing. This is because the market cap provides much more of an insight into the potential for growth.
The growth of a coin is somewhat constrained by its total supply. If two cryptocurrencies are both worth $1, but one of them has a circulating supply of 1 billion and the other of 1 million, the market caps are very different. One has a market cap of $1 Billion and the other only $1 million.
$1 x 1,000,000,000 = $1,000,000,000 market cap
$1 x 1,000,000 = $1,000,000 market cap
You can then compare these two cryptocurrencies to the lowest market cap in the top 10, about $4 billion. The reason I have picked this spot is because reaching this place would be a massive achievement – the tech would have to have an outstanding reception with the community. However, it is definitely attainable if the project is strong, so it provides a good insight into potential growth relative to the existing market.
If our coin with $1 billion market cap were to reach this spot it would have increased 4x in value, so the coin would now be worth $4.
On the other hand, the coin with the $1 million market cap would have to increase by 1000x. These coins would be worth $1000 each.
Both the coins in this number 10 spot would have an equal valuation in terms of market cap, but the prices would now be very different. This shows how much more of an effect market cap has on future valuation compared to price.
Does it matter?
The reason this is important is you need to put this into perspective and not invest in a popular coin just because it’s cheap and you have heard it could be the next Bitcoin. Yes, it could be the next Bitcoin in terms of market cap (it probably won’t be) – but it almost certainly won’t be the next Bitcoin in the case of price per coin as Bitcoin has a low supply compared to most coins.
This comes from a real example. A lot of people bought into XRP because they heard/thought it could be the next Bitcoin, and it was a ‘steal’ at only a dollar or two per coin. The fact is XRP has a max supply over 4700 times larger than that of Bitcoin, so for the price to reach anything close to Bitcoin’s highs would be extremely unrealistic. This is due to the constraints of market cap.
No one knows how large the overall market cap for all coins can grow to, so within reason a coins market cap could reach unprecedented levels and the price would reach unexpected levels. However, it is possible to compare the market caps of the most popular coins to understand potential growth and not expect unrealistic gains. This allows you to consider potential growth relative to the current market, which really is the most important thing.
Market cap isn’t everything
Now that I have said why market cap is so important I want to outline a misconception about market cap.
The market cap does not represent the total amount of money put into a crypto. It represents the total amount that the circulating supply would be sold for at the current market price. If everyone tried to sell their coins at the market rate at one time the price would heavily decrease.
Furthermore, this illustrates the fact that the market cap can be increased due to a small or limited number of trades.
A small number of carefully executed trades could raise the price of a coin which would raise the market cap – the rest of the coins in circulation would not have been bought at this price. Most of them were bought and held from much lower than the current price. So you can see the market cap is not the total amount of money invested – it is just a simple equation, so keep that in mind.
Circulating supply and total supply
Cryptocurrency market cap can also increase or decrease while the price of a coin does not change – this is due to the circulating supply changing.
Some coins can be mined, which means over time more coins are added to the circulating supply which increases the market cap.
Other coins are not all distributed during release. They are not able to be mined, but are released by the developers at various stages in the roadmap for different reasons.
The circulating supply can also decrease if coins in circulation are ‘burnt’.
This brings up the important of doing your own research before investing and reading the white paper. It is important to know the current circulating supply, the max supply and how exactly the difference between the two is going to be distributed over time.
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