A market cap is a large number that shows how many tokens are in circulation and their total market price. While it shows how many coins are tradeable, it doesn’t show the real market demand. For example, it doesn’t include the number of tokens locked in DeFi protocols unlike the Total Value Locked (TVL).
The most successful cryptocurrencies often have the largest market caps. Today, overall crypto markets have at least a $1 trillion market cap, 60% of which comes from Bitcoin and Ethereum. Out of the thousands of tokens, only a handful make up 90%+ of the market valuation.
People also like investing in large-cap tokens because they’re often associated with high volume, demand, and utility. Whether that’s true or not, the general assumption is that high market caps indicate incoming price increases.
While correlated, this isn’t really true:
Market capitalization is calculated by multiplying two metrics: the latest token price and circulating supply. You can see that trading volume doesn’t appear in the formula, which is why market caps aren’t useful trading indicators. But they’re useful to understand your project’s tokenomics:
While market caps don’t show actual demand, they do show the supply that regulates that demand. For example, a stablecoin reducing its circulating supply might indicate reduced liquidity and potential de-pegging. A cryptocurrency that approaches its max supply might lead to price rallies because of scarcity.
When you multiply the price by maximum supply, it’s called Fully Diluted Market Cap. It hypothetically shows much the market could be worth at current prices. If there’s no max supply, it’s the same as the ordinary market cap.
Market caps can be insightful for the few coins that dominate the crypto markets. But for the most part, the market cap is a vanity metric. Big caps have higher credibility and attract more buyers, but they don’t mean much to value investors and technical analysts.
The overall cryptocurrency market cap is just as meaningless:
If you completely removed market caps from metric analysis, you’d still be able to trade just as effectively.
Calculating cryptocurrency value is a lot more than looking at market caps or prices. It’s about understanding the utility of a project and how it reflects on the price in different markets. There’s no easy way to find homerun projects overnight, but there are fundamental principles for crypto investing that you can follow:
Explore the ecosystem. Just like transactions become safer with longer chains of blocks, projects solidify their market value when others build on top. One reason Ethereum stands so well against superior blockchains is that it has the largest ecosystem of apps, forks, and layer-2 solutions. If the project is also cross-chain compatible, it becomes more accessible outside its ecosystem.
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Max is a European based crypto specialist, marketer, and all-around writer. He brings an original and practical approach for timeless blockchain knowledge such as: in-depth guides on crypto 101, blockchain analysis, dApp reviews, and DeFi risk management. Max also wrote for news outlets, saas entrepreneurs, crypto exchanges, fintech B2B agencies, Metaverse game studios, trading coaches, and Web3 leaders like Enjin.