Crypto Market Cap Explained: How Big of a Deal Is It?

23 July 2018

Are you wondering what does a market cap mean in cryptocurrencies? In this article, we’ll take a closer look at that.

Investing in the seemingly always volatile crypto market can be exhausting at times. If you’re following our strategy of diversifying portfolio, you’d probably have a few projects invested in and maybe a couple more on your radar. With all the possible numbers, indicators and measurements for every single position, it can get pretty confusing pretty fast.

That’s why it’s important to look at these numbers and not only compare them over time but also understand what they mean. With this knowledge it’ll be easier to predict the behaviour of a project in various situations.

In the times of not so steady waters it’s good to reiterate your understanding of the basics or to grasp them if you’re just coming in in the first place.

So, What Is a Market Cap?

Market cap is basically a project’s overall value expressed in dollars (or some other currency). Two factors are needed to calculate the market cap. First is the value for one coin (or token) and the second is the circulating supply. Whereas the first factor is pretty trivial, we should make it clear from the start what the deal with this whole ‘supply’ thing is.

Let’s take the example of Request Network. One token is worth $0,083733 and there are 697.641.634 REQ tokens in circulating supply. Multiply one by the other and we get the market cap of $58.415.627.

But What’s a Supply in the First Place?

Supply is a certain number of coins or tokens and there are a few types of it. The most spoken of – and arguably the one with most impact – is the aforementioned circulating supply. It’s the total amount of coins available to the general public on the market. If you can get your hands on it, it’s in the circulating supply.

The other type of supply, much less heard of, is total supply. It’s the total number of coins currently in existence, i.e. circulating supply plus all the coins that are for some reason not purchasable. An obvious example for such coins would be the ones that a team of a given project holds in reserve for later financing.

Then there is also maximum supply which is the total amount of coins ever to be created or mined. In the prime example of Bitcoin there are 21 million coins to ever be mined.

The following chart puts these three supplies in a more understandable context:

marketcap

How Does Maximum Supply Play into That?

Maximum supply is also an important number to be considered. It says how many coins of a given cryptocurrency will there ever be. It helps you to grasp at first glance how much growth room for a cryptocurrency there is.

In the example of Bitcoin, the maximum supply is 21 million and at the time of writing there are over 17.1 million mined coins. It means that until approximately the year 2140 just under 4 million additional Bitcoins will enter circulation. 4 million spread well over a hundred years is rather little. That way you can be sure that your holdings won’t deflate (or inflate) too much due to the mining process.

The rate at which new coins come into circulation is also important. In the case of Bitcoin it’s very transparent – for every mined block, the miner gets rewarded with a set number of Bitcoins. However in some other cases, say Tether, things might not be that clear. Some cryptocurrencies, like Nexus, don’t even have a fixed total supply at all and that’s okay too.

As long as you understand the reasoning behind the maximum supply (the most common being calculating a proper inflation rate), everything is just fine. Though we feel obliged to emphasise it once more: you should (at least at the most basic level) understand why the maximum supply is set to a particular number and how is it going to be reached.

What Significant Conclusions Can You Draw from That?

There are a couple of factors to be wary of: first thing that should immediately pop up to your mind is the gap between the total supply and the circulating supply. If it’s relatively small there is not much to worry about. That is as long as you know what’s that gap caused by, i.e. team is holding some additional funds.

However, if you don’t know the reasons behind the gap or if it’s unusually big you should start digging.

We’re of the opinion that in crypto all things should be transparent (obviously to a healthy extent). If you keep digging deeper and deeper, doing background checks on the team, looking for some explanations of the project other than its whitepaper one of the two results should occur: either the whole thing gets more and more convoluted, causing only more concern or it all gets clearer and clearer until the point that you can make a decent sense of it.

Another thing tightly correlated to a project’s size is it’s swing ability. This goes both ways for the upswings and the dowswings. The smaller the market cap, the bigger the swing potential – respectively, the bigger the market cap, the smaller swing potential.

For instance, imagine a cryptocurrency X that has a small market cap of $100 million. If someone purchases another $10 million worth of tokens X, we’d have a 10% growth which for some is a massive gain and for others is just another crypto day.

Now imagine the same purchase of $10 million dollars but now it’s of cryptocurrency Y with a market cap of $10 billion – 100 times bigger than the one of X coin. Therefore the growth we’d be looking at here would be 100 smaller – 0.1%.

The behaviour in case of selling is essentially the same – the bigger the market cap, the smaller impact of a sale.

Basing on that brief example you can clearly understand what notable meaning the market cap of an asset has. Investors with more risk affinity can seek to invest in project with a relatively small size whereas those wishing for a more secure allocation of their funds should rather look for a little bigger projects.

It should go without saying that market cap is only one of a multitude of crucial factors when considering investing your money in any project and should never be a standalone reason for or against a particular investment.

References:

https://coinguides.org/circulating-supply-total-supply-max-supply/

https://coinmarketcap.com/faq/