There is no doubt that there are many investment instruments in the decentralized financial sector as well as in the traditional market. This creates a dilemma for investors who want to find the best combination of securities to invest in. Of course, there are different ways of evaluating the market performance of the assets such as using fundamental analysis which deals with analysing the key aspects of a business such as management style, the balance sheet and profit and loss statements, among others. However, in the crypto sector investors also assess the market capitalization of a project. Studying an organization’s market capitalization will help you to understand its development and other attributes.

What Is Market Capitalization?

In the blockchain sector, market capitalization refers to the total market value of a cryptocurrency or any other digital assets. For public companies market capitalization means the total value of its shares or stocks. It is easy to calculate the market capitalization of a cryptocurrency. You simply multiply the total number of cryptocurrency by its current price. For crypto organizations that use initial coin offering (ICO), the initial market capitalization is established after the ICO. Remember as well that the cryptocurrency’s market capitalization is not a fixed figure. Instead, it changes from time to time whenever there is a fluctuation of the price.

Source: Blockgeeks

Market capitalization = current price of the token X the number of tokens in circulation.

After the initial coin offering phase, the market capitalization, popularly referred to as the market cap, is determined by the supply and demand of the cryptocurrency. In general, we use the circulating supply to calculate the market cap of a cryptocurrency. However, some organizations use the token’s total maximum supply figure to calculate the market capitalization. In this case, the value we get is called a fully diluted market cap. We shall discuss this in detail later.

Importance of Market Capitalization to an Investor

Market capitalization shows the size and potential of a cryptocurrency. The size of the cryptocurrency in terms of market capitalization is very important as it determines the other variables which investors analyze before investing in the company. In the crypto sector, the size of the market cap has great bearing on the confidence of the investors. Normally, cryptocurrencies which have higher market capitalization are more stable than those with smaller ones.

Likewise, investors use market capitalizations of cryptocurrencies to determine the potential for growth. Usually, they are more willing to invest in cryptocurrencies that have high market capitalization. That is the reason why Bitcoin, Ethereum and Binance Coin get more investments than the cryptocurrencies that are outside the top 20 range, for example.

The market capitalization of cryptocurrencies is a very good indicator for investment for many novice investors in the blockchain sector. Such investors normally gauge the viability of a crypto investment based on the market capitalization and its current price. Even if some novice investors may not be aware of the exact market cap of cryptocurrencies, they use their ranking from popular crypto aggregators such as CoinGecko and CoinMarketCap to make their investment decisions. Some people simply opt to invest in cryptocurrencies that are within the top 10, based on market capitalization. As such, they may just visit CoinMarketcap and select the best performing cryptocurrencies at that particular moment.

Classifying Cryptocurrencies Using Market Capitalization

It is a common practice to classify the sizes of cryptocurrencies using market capitalization. They are classified as large cap, medium cap and small cap cryptocurrencies.

Large Cap Cryptocurrencies

Large cryptocurrencies have a market capitalization of at least $10 billion. Most of these are cryptocurrencies that have been in existence for a long period and are firmly established. Also, these are cryptocurrencies that are highly ranked at crypto aggregators. Although It does not always mean that investing in these cryptocurrencies will bring high rewards, they tend to have more stable prices than the other tokens. Examples of large cap cryptocurrencies are Bitcoin, Ether, Cardano (ADA) and Ripple (XRP). Many investors consider large cap cryptocurrencies as low-risk investment assets since they have maintained sustainability and liquidity over time.

Medium Cap (Mid-Cap) Cryptocurrencies

The mid-cap cryptocurrencies have a market capitalization of between $2 billion and $10 billion. Normally, these are well-established tokens or coins which have the potential for growth in the future. They have more risks than large cryptocurrencies. Examples of mid-cap cryptocurrencies are Axie Infinity (AXS), Stellar Lumen (XLM), VeChain (VET), Polygon (MATIC) and Internet Computer (ICP).

Small Cap Cryptocurrencies

These are cryptocurrencies that have a market capitalization of between $300 million and $2 billion. Most of these may be recently established cryptocurrencies with potential for growth. Some of these cryptocurrencies are for very promising projects with innovative products. Many of these offer DeFi and gaming products.

Fully Diluted Market Capitalization

So far, the market capitalization we discussed is based on circulating supply. Circulating supply refers to the quantity of a cryptocurrency which is currently on the market. This is different from the maximum supply, which includes the tokens or coins which are not yet in the market. In the case of Bitcoin the maximum supply is 21 million, yet the circulating supply is 18, 970,300. The circulating supply is less than the maximum supply because some BTC are yet to be mined. Therefore, fully diluted market capitalization is based on the maximum supply of a cryptocurrency, but the method of calculation remains the same.

Comparing the Values of Cryptocurrencies

You can find the values of different cryptocurrencies on crypto aggregators such as CoinGecko and CoinMarketCap or on exchanges. Most of these platforms provide real-time values of the cryptocurrencies. However, CoinMarket seems to be the most used aggregator.

Effectiveness of Using Market Capitalization to Assess Investment Opportunities

It is clear that a cryptocurrency’s market capitalization gives an indication of its level of risk. However, some analysts have raised a few red flags of using market capitalization to evaluate the investment potential of a cryptocurrency. For example, they argue that the cryptocurrency’s market capitalization is not a very reliable tool for assessing the investment potential of a cryptocurrency. The reason is that some cryptocurrencies are over-valued while others are undervalued.

A related argument is that some projects manipulate the prices of the cryptocurrencies in order to lure investors. Therefore, market capitalization derived from manipulated prices does not give a realistic investment potential of a cryptocurrency. Also, market capitalization reflects the price of the cryptocurrency, not its value. The cryptocurrency’s inherent value depends on its utility.

These arguments should not make you think that a cryptocurrency’s market capitalization is not useful in evaluating its investment potential. Rather, the point is you should use a combination of tools when evaluating the performance of a cryptocurrency. And clearly, market capitalization should be among these tools.

Conclusion

In short, market capitalization is about how valuable a cryptocurrency is. Since one of the variables of market capitalization is the price of the asset, the demand and supply of the cryptocurrency determine it. We get the value of the market cap by multiplying the current price of the cryptocurrency by the circulating supply. In terms of the fully diluted market cap we multiply the cryptocurrency’s maximum supply by the price. Although the market cap is an essential tool for assessing the market performance of an asset, it is important to use it alongside other criteria. Currently, the easiest way to find the market capitalization of a cryptocurrency is to get the current figure on any of the crypto aggregators.