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Crypto market capitalization: the term and its role in global rating of digital assets
Market Cap Explained
Cryptocurrency
19.09.2021
Updated 28.11.2021
10:53

Market capitalization is a term that was long and well entrenched in the global investment sector. And if more than ten years ago, it was used by stock market experts mostly, now it is also applied to the cryptocurrency field. Capitalization defines the current market value of all cryptocurrencies issued and available for purchase/sale by users.

We need to understand that among these currencies, there are also:

Even if the rate stabilizes, many assets have a potential for growth of capitalization due to the release of new and new coins.

Cryptocurrencies with limited emission (for instance, Bitcoin with the maximum potential number of tokens of 18 million units) will increase capitalization mainly through scarcity.

Cryptocurrencies without limits on creation (like Ethereum) will increase capitalization, namely by means of unlimited growth of a number of their tokens.

Also, it’s necessary to focus on the total market capitalization of the whole digital money market. It signals how high the perspectives of the overall sector are and how well people believe cryptocurrencies without reference to a specific asset, which is usually Bitcoin.

Crypto market cap: what it is 

It’s pretty easy to calculate the market cap of one of the cryptocurrency projects. To define this parameter, you need to:

Actual numbers may easily be found at such recognized world platforms, like well-known CoinMarketCap. You may also effectively track total market capitalization that reflects the overall situation in the field there.

Despite the fact two leading cryptocurrencies (Bitcoin and Ethereum) form a prevailing part of the capitalization of the global market of blockchain money, total capitalization exceeds that number almost twice. It means that from 40% to 50% of the market is in other altcoins. And both their accomplishments and problems may significantly affect the financial and reputational indicators of the market.

Crypto market capitalization on example

Market capitalization (or Market Cap, how English-speaking sources call it) is the current total value of all coins of one cryptocurrency network.

Here are two cryptocurrencies: TestCoin 1 and TestCoin 2:

Which one of these assets has a higher parameter of capitalization? Let’s answer this question.
Capitalization of TestCoin 1 = 100 dollars (the cost of a unit) x 1 000 (the quantity of cryptocurrency tokens) = 100 000 dollars.

Capitalization of TestCoin 2 = 2 dollars (the cost of a unit) x 60 000 (the quantity of cryptocurrency tokens) = 120 000 dollars.

As we can see, even though the number of TestCoin 2 tokens is 60 times higher, the overall capitalization of the project is only 20 thousand dollars more. And that is because the cost of an asset unit is much lower compared to TestCoin 1. 

Total market capitalization of cryptocurrency: explanation 

The total market capitalization is a parameter consisting of many elements. It includes all parameters of capitalizations of such separate projects like:

The indicator of the total market cap is considered to be extremely important and worth attention since it represents the size of the field in general. Besides, this indicator may be compared with other ones, which allows making predictions on developments in the future.

For the last eight years, the parameter of the global value of all digital money on the basis of blockchain has increased from 1 billion to more than 2 trillion dollars. And even today it continues to steadily remain higher than that mark.

Who and for what needs total capitalization of cryptocurrencies

The main goal of defining the overall capitalization index is to create a basis to compare it to other fields and sectors of the world economy. Most often, analysts pay attention to these numbers in scenarios when they need to compare the amount of money constantly circulating in the market of blockchain money in comparison with global investments into precious metals or stocks / other securities.

Why do specialists do that? If you delve deeply into this question and deal with quality analytics based on the capitalization indicator, it’s possible to make efficient market development predictions years and even decades forward. And it may enrich investors who will send a part of their portfolios to the market of digital money or will withdraw them instead.

Conversely, the cryptocurrency market is highly variable and too volatile, so you can’t trust predictions 100%. However, they may serve as a pretty good guide for further actions.

Why is total market cap seldom useful for investors? 

It is always a bad idea to make some vital financial decisions using the indicators of growth or drop of the total market capitalization of cryptocurrencies exclusively. This parameter is too deceptive and may play a bad joke for newbies.

It helps you to understand the perspectives, but without taking into account market evaluations of each of the top assets, it makes no sense.

Today capitalization may have one quantity of zeros in the number, while tomorrow, it will be completely different. All of that is only an indicator of the state of the cryptocurrency industry. And the situation of some individual projects may be far worse than in the market generally.

Use of extra metrics of market cap of cryptocurrencies 

Like we have said before: when defining capitalization, the number representing the overall volume of tokens that are already issued and can be easily traded in the market is used. Nevertheless, there are also other types to evaluate network value – for instance, diluted market cap.

This parameter came from the stock market. In the case with cryptocurrencies, it unites both actually available tokens and those that will be released in the future.

An example:

If the usual Bitcoin capitalization is a little bit more than 836 billion dollars today (at a rate of 44 459 dollars per unit), then the diluted market cap will be almost 934 billion dollars.

The indicator isn’t the most efficient and is less than accurate. But it can be applied both to Bitcoin and to all other digital assets to evaluate if there’s a specific investor underestimation or overestimation at this stage.

Deflationary tokens and their capitalization

If the majority of cryptocurrencies remain in the same quantities or increase the volumes of tokens, there are also assets, the quantity of which is decreasing. These are called deflationary tokens.

As a rule, the project’s administration initializes such a process. They have a lot of tokens in their accounts and burn them from time to time, fully and irrevocably removing them from the market. There are two ways they do it – either by deleting data about a wallet or by sending digital money to a non-existent address.

Thus, they manage to make the asset a scarcer one and increase its value. As a result of these actions, general capitalization grows along with the cost of every individual cryptocurrency.

General conclusions about market cap of cryptocurrencies

The market capitalization of individual assets or the whole market generally are essential indicators that require the attention of an active investor. Using them, one can effectively monitor the trend directions within the market and use them to reach personal goals.

But it’s worth remembering that market capitalization is only one of the parameters that should be studied and used in combination with other approaches. Only in this case, you’ll be able to reach maximal efficiency and profitability of the financial activity.