The current cryptocurrency market cap sits at approximately $121 billion. This figure, when compared to $102 billion in November 2018, looks formidable. However, it dwarfs in comparison to the euphoric figure of $800 plus at the peak of the cryptocurrency bull run.
Yet, somehow, it would seem that BUIDLers are working more incessantly when the market cap has plunged by more than 80 percent. Regulators are more lenient today compared to a year ago, and focus is more on building rather than hyping the technology. Obviously, in such a case, market capitalization cannot be relied upon as a proper indicator of the state of the industry. This begs the question, what exactly is market cap and why is it important?
In this crypto guide, we will touch upon the subject of market cap and its implications for the budding industry. We will talk about what is a market cap, how to calculate it, types of market cap, and most importantly, does it really matter?
What is the market cap?
Market cap is widely regarded as the measuring stick to gauge the health of an industry. Larger the market cap of an industry, or cryptocurrency in our case, the larger the amount of funds it commands in the wider market. For example, take Bitcoin. At the time of writing, BTC has a market cap of approx $64 billion, making it the largest cryptocurrency in existence.
How to calculate market cap?
Fortunately enough, unlike other complex finance formulae, calculating market cap is a relatively simple task. The golden formula to calculate market cap is:
Market Cap = Market Price x Circulating Supply”
Fairly straightforward, isn’t it?
Similarly, you can compute the market cap of any cryptocurrency in circulation. Just pick the current market supply of the digital token and multiply it with its current price.
For example, if the current supply of BTC is 2 million and the current price stands at $100,000 (How I wish!) then BTC’s market cap would be 2,000,000 x 100,000 = 200000000000
As things stand, BTC has market dominance to the tune of 52.7 percent, which means that the premier cryptocurrency is responsible for 52.7 percent of the total market cap figure of $121 billion.
What are the types of market caps?
In the crypto industry, usually, two types of market caps are used. The market cap of a cryptocurrency and the total market cap of the industry.
The market cap of a digital currency is the same as previously discussed, i.e. the market cap of BTC, ETH, XRP, LTC, and others. On the other hand, the market cap of the industry is the sum of the market cap of all the cryptocurrencies circulating in the industry.
While the market cap of a cryptocurrency can be used to estimate its size and for its comparison with other cryptocurrencies, the market cap of the industry can be used to gauge the overall health of the ecosystem.
At the time of writing, the market cap of the entire industry sits at $121 billion. The top ten cryptocurrencies at the time are Bitcoin, Ether (ETH), Ripple’s XRP, Litecoin (LTC), EOS, Bitcoin Cash (BCH), USDT, TRX, Stellar Lumens (XLM), Binance Coin (BNB), and Bitcoin Cash Satoshi’s Vision (BSV).
The Relevance of Market Cap?
In the world of finance, the larger the company, less are its chances of failure. There are, however, always the outliers (Looking at you, Enron.)
The theory also applies to the world of cryptocurrency as the underlying economic principle remains the same. Larger the cryptocurrency, lower is its volatility. Conversely, the smaller the market cap of a cryptocurrency, the higher the chances of it experiencing steep volatility and the higher is the risk attached. Investors with a high-risk appetite might find digital currencies the better investment. Whereas, the more risk-averse investors might find solace under the typically stable cryptocurrencies like Bitcoin and XRP.
However, it’s worth highlighting that cryptocurrencies with small market cap don’t necessarily mean gambling. A project with a sound team and vision and a real-world use case can give 5x, 10, or even 50x return in a relatively short time. Although, the chances of that happening are minuscule.
Further, it is also likely that coins with a small market cap have a high degree of being manipulated by traders with large holdings, often called “whales” in the cryptoverse. It is extremely easy for traders with large holdings to manipulate the price of digital coins by using the classic approach of “pump and dump.” The lack of regulatory infrastructure further encourages whales to manipulate the market.
Hence, it’s at times like these that Bitcoin’s 11 years old history comes in handy. Thanks to the high value and trading volume of BTC, it is nigh impossible to manipulate the BTC market.