What is the Market Cap of Cryptocurrencies (Market Value)?
The term Market Cap (Market Capitalization) refers to market value. Analyzing the market value of a cryptocurrency can be a suitable investment metric because it determines the size and relative value of a cryptocurrency. Unfortunately, many people, due to their unfamiliarity with this term, rely solely on the price of the cryptocurrency in the digital currency market and use this incorrect metric to make their trading decisions. Cryptocurrency rankings in many sources are based on this metric.
The market cap of cryptocurrencies is calculated by multiplying the number of tokens of a project by its price. A token, technically, is an asset that can include any form of cryptocurrency, excluding Bitcoin and Ether. This asset represents value or ownership in a decentralized system, and in this regard, it resembles digital assets and cryptocurrencies. In fact, we can say that a token refers to a cryptocurrency without a specific blockchain that operates on other blockchains such as Ethereum.
Liquidity in the Market Liquidity, also referred to as Liquidity, refers to the readiness of an asset to be converted into its monetary equivalent and bought and sold in the market. In other words, liquidity is the ability of an asset to be converted into cash.
Market liquidity is a term used to refer to the liquidity of assets in a market, for example, in the cryptocurrency or stock market. Each market allows its assets to be bought, sold, and exchanged at specific and transparent prices. When liquidity in a market is low, it becomes very difficult to convert assets into cash and carry out transactions in that market.
In the cryptocurrency market, liquidity refers to the ease of converting a cryptocurrency into cash. One of the most liquid cryptocurrencies in this market is Bitcoin. Market liquidity is crucial in evaluating the market.
An important indicator of liquidity is the ratio of daily trading volume to market value, which is expressed as a percentage. A high value for this indicator for each cryptocurrency shows high liquidity. Additionally, a high value for this indicator indicates the stability of the cryptocurrency market and predicts that you will face less price slippage when exchanging this cryptocurrency.
What is the Daily Trading Volume Indicator? The daily trading volume indicator is an auxiliary and secondary metric that can be very helpful for investors in the cryptocurrency market. To calculate this indicator, the number of cryptocurrencies traded in a 24-hour period is multiplied by their price.
When daily trading volume increases, it indicates that the price of the cryptocurrency has reached a point where there is a possibility of a trend reversal. Many traders use the daily trading volume indicator as a confirmation before entering a trade.
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How to Calculate Market Cap or Market Value?
Market cap of cryptocurrencies is an important metric to determine the market value. Assets are categorized based on market cap as follows:
- Mega Cap: When the market value is over $200 billion.
- Large Cap: When the market value of a cryptocurrency or any other asset is between $10 billion and $200 billion.
- Mid Cap: When the market value is between $2 billion and $10 billion.
- Small Cap: When the market value is between $250 million and $2 billion.
- Micro Cap: When the market value is below $250 million.
Determining the market cap of cryptocurrencies is of great importance, and its most important applications include determining investment risk, the ability to manipulate the market, and evaluating the importance of an asset in the market.
In fact, it can be said that the market value has an inverse relationship with the level of investment risk because the higher the market value of a particular cryptocurrency, the lower the risk for investors. A higher market cap also makes the cryptocurrency market less susceptible to manipulation. A cryptocurrency with a low market cap might be manipulated by opportunists who collect large quantities of the cryptocurrency to control its market.
As previously mentioned, the calculation of the market cap of cryptocurrencies is done by multiplying the number of tokens of the project by its price, and the result gives the market value of the cryptocurrency. For example, if the circulating supply of Bitcoins is 18,453,032 and each is traded at $29,280, the market cap of Bitcoin is the product of the two numbers 18,453,032 and 29,280.
What is Total Market Cap?
Total market cap refers to the market data of several cryptocurrencies. For example, the market data of Ethereum, Ripple, Bitcoin, and Litecoin is referred to as total market cap. Total market cap in the crypto market represents the combined value of Bitcoin, all tokens, altcoins, and other digital assets in the cryptocurrency market. Total market cap is also one of the important indicators that analysts need to pay attention to because it can indicate the size of this industry.
Market Cap Analysis
The market cap of cryptocurrencies can indicate their position in the market. The higher a cryptocurrency's market position, the more popular it is among investors, and the lower the investment risk in this asset. The lower the market value of a cryptocurrency, the higher its price volatility and the greater the potential for price manipulation.
Market Value and Investment Strategy
First, it is better to become more familiar with the factors that influence market cap or market value:
- Number of coins or tokens in circulation To calculate market cap, the number of coins or tokens in circulation is important because it is one side of the market cap formula for cryptocurrencies. The more coins or tokens in circulation, the higher the cryptocurrency's market cap.
- Price Volatility Price changes, which are influenced by supply and demand, represent the other side of the formula for calculating cryptocurrency market value, and their increase affects the increase in market value. The higher the demand, the higher the price of an asset, which in turn leads to an increase in market cap.
Many factors can increase demand in the market, such as changes in interest rates and other macroeconomic data, the rising popularity of an asset, etc. Of course, market whales can also increase or decrease demand, thus affecting the price of an asset either positively or negatively.
Investment strategy in the cryptocurrency market can take various forms, which should be selected based on the market value of the specific cryptocurrency you are considering. For example, buying and holding a cryptocurrency for the long term, staking tokens, buying and selling NFTs, etc., are different types of investment strategies in the cryptocurrency market.
Types of Supply in Cryptocurrencies
There are different types of supply in the cryptocurrency market, which are outlined here: Circulating Supply Circulating supply refers to the number of tokens available for trading in the market at any given moment. In other words, the number of tokens currently available for trading in the market is called circulating supply. This metric is important in calculating market cap because the market cap of cryptocurrencies is derived by multiplying the price of each token by the total number of tokens available in the blockchain. Even tokens that have disappeared or been confiscated from the blockchain are considered as part of the total number of tokens in the blockchain.
However, in another metric called realized market cap, which is considered a subset of market value, the price of a token is calculated based on its last transaction price rather than the current price. In this index, inactive and disappeared tokens are excluded, and therefore, they have no effect on the price.
Total Supply The total supply of a cryptocurrency is calculated by the sum of the circulating tokens as well as the tokens that have been minted but are not yet distributed in the market. Minting is the first step to turning an asset into immutable content. In this process, an asset is converted into a specific NFT with defined ownership.
Maximum Supply The total number of tokens that are going to be mined is known as the maximum supply. The quantity of these tokens is usually determined at the time of the creation of the Genesis Block. The Genesis Block or Block Zero is the first block in a blockchain, and all other blocks must be linked to it.
Infinite Supply In infinite supply, there is no limit on creating new tokens or mining them, and as a result of infinite supply, the token becomes inflationary, and its value decreases over time.
The importance of circulating supply and maximum supply is equal, and understanding these two supplies, along with total supply, clarifies the impact of these indicators on the cryptocurrency's price and helps investors use appropriate strategies based on how these metrics function.
Is Market Value the Best Way to Measure the Popularity of a Cryptocurrency?
It is better not to rely solely on market value or market cap as the decision-making metric for purchasing a specific cryptocurrency. While it is evident that the market value of a cryptocurrency can indicate the broad trust of investors in it, the following factors should also be considered:
- Fundamental and Technical Analysis
- Trading Volume and Liquidity Measurement
- Technologies and Innovations Used
- Legal Status of the Cryptocurrency
Impact of Market Cap and Asset Supply on Price
Crypto assets generally have the highest available coin supply, which is pre-defined in their code. The available supply of each asset grows continuously until it reaches the maximum supply. Mining or staking are two different methods of validating blockchain networks.
Mining uses the computational power of computers to solve mathematical puzzles and, by verifying transactions, adds new blocks to the blockchain. Staking refers to the process in which a user locks their assets in proof-of-stake networks to help the blockchain function.
The number of tokens or coins can increase until the maximum supply is reached, after which no further tokens or coins will be supplied to the market.
Understanding the concept of market cap related to the price of a specific asset is important and enables investors to make a realistic evaluation of the cryptocurrency market. Evaluate each asset based on its market cap, supply, and price.
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Famous Cryptocurrencies with the Highest Market Caps The three cryptocurrencies, Bitcoin, Ethereum, and Tether, have the highest market caps in the digital currency space. These three cryptocurrencies typically hold the top three positions in terms of market value. Binance Coin, Solana, USD Coin, Ripple, Dogecoin, Ten Token, and Cardano also currently rank in the 3rd to 10th highest market caps in the cryptocurrency market.
Market Cap's Role in Balancing an Investment Portfolio
Some investors believe that it’s better to diversify their cryptocurrency investment portfolio, but more experienced investors argue that diversity in the market cap of selected cryptocurrencies in the portfolio is of even greater importance.
Individuals with lower risk tolerance typically allocate most of their portfolio to Bitcoin, which has the highest market cap in the cryptocurrency market. However, those with higher risk tolerance use smaller cryptocurrencies whose market caps are medium or small in the digital asset market. Assets with higher market caps typically ensure the security of the investment portfolio.
Introducing CoinMarketCap Website CoinMarketCap is one of the powerful platforms for analyzing and reviewing cryptocurrency projects. On this platform, a wide range of cryptocurrency data is covered. It complements TradingView and ranks cryptocurrencies by market cap while providing price charts, cryptocurrency exchange rankings, and other essential tools for investors' analysis and research.
This platform tracks the market capitalization of over 20,000 tokens and coins and lists their total supply, circulating supply, and 24-hour trading volume.
Introducing CoinGecko Website CoinGecko is one of the well-known websites in the crypto market. It offers a lot of information about cryptocurrencies such as price volatility, trading volume, and more. It also provides a list of cryptocurrencies sorted by market capitalization from the highest to the lowest. Key data such as historical data for cryptocurrencies, popular and trending tokens, DeFi tokens, cryptocurrency price charts, and exchange rankings are available to the public on this site. Moreover, educational videos about cryptocurrencies are also available on this platform for interested individuals to use.
Final
Thoughts Cryptocurrency market cap, also known as market value, is one of the most important factors to consider when selecting and trading cryptocurrencies. The method of calculating and analyzing market value was also explained in this article. If you plan to invest in the cryptocurrency market, it is better to consider not only the market value but also the other options discussed in this article to minimize the risk of your investment portfolio.
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