Importance of Crypto Market Capitalization

Cryptocurrencies gained popularity around the world, as more and more people are willing to invest in Bitcoin, Ethereum as well as other cryptocurrencies. It is desirable to have at least some knowledge about the crypto market capitalization. The market capitalization applies as much to stock markets as it does to cryptocurrencies and blockchain projects. Importantly, it tells us the current market value of a given cryptocurrency or blockchain network.

People should take into account that an equally important metric is the total market cap of the entire crypto industry. As a reminder, the total value of all crypto assets is much bigger than just Bitcoin or Ethereum.

Importantly, Bitcoin as well Ethereum are the two biggest projects by their market capitalization rank. Interestingly, market capitalization is the current market value of a cryptocurrency network. It is quite easy to calculate market capitalization. All a person has to do is to multiply the circulating supply of a crypto asset by the price of an individual unit. Notably, the total market cap depicts the total value of Bitcoin, altcoins, stablecoins, tokens, as well as all other crypto assets on the market combined.

Due to the relatively high volatility of the cryptocurrency markets, the values tend to shift around quite a bit. As a reminder, the combined crypto market capitalization is often a basis for comparison with other sectors in the wider economy. For instance, many analysts often compare the total crypto market cap to the market cap of precious metals or stocks.

It is worth noting that, no one knows the best way to estimate the valuation of cryptocurrencies and blockchain projects.

Important details

It is worth mentioning that making financial decisions based on the total crypto market capitalization can be misleading for various reasons.

As a reminder, the first order of business is to ensure the correct market valuation for every project individually. Importantly, this is done by taking the supply figures and multiplying it with the price per asset. However, it can be difficult to determine the correct supply information. Notably, if that data is incorrect, any further calculations will automatically be invalidated as well.

Furthermore, it can be possible to manipulate the market cap of some projects. People should keep in mind that some projects do it to create a false sense of security and value. As a result, staring at the total market capitalization without questioning what it means has the potential to create problems.

It is worth mentioning that a total market capitalization is merely a number that represents a certain moment in time. Notably, it can represent nine figures today, ten figures next week, and eight figures in 6 months. Moreover, it only represents a snapshot of the cryptocurrency industry at that time.

How to calculate the market capitalization

Interestingly, there are multiple ways to calculate market capitalization. For example, one way to get an estimation of the future value of a network is what readers call the diluted market cap.

As a reminder, the term “diluted market cap” comes from the stock market. It’s also important to keep the current and future supply of a crypto asset in mind. Notably, not all cryptocurrencies, tokens, and assets have their entire supply available at this time.

People should take into consideration, that this same concept applies to all other crypto assets on the market as well. Interestingly, a diluted market cap simply takes an asset’s current price and multiplies it by the maximum supply to ever circulate.

It is worth mentioning that many cryptocurrencies will see their circulating supply increase over the years. It means in such cases, the diluted crypto market capitalization will be higher than it is today, even if the price stays the same.

In the meantime, deflationary tokens are trying to actively reduce their supply. Notably, this can be done in multiple ways, one of which is through a process known as a coin burn.

As a reminder, if the asset’s value does not increase over time and its supply keeps decreasing, its diluted market cap years into the future can be lower than it is today.

Last but not least, crypto market capitalization is one of the essential metrics to watch. Importantly, it can also be useful to distinguish between what is being reported now, as well as what the diluted market cap can be further down the line. However, there are other aspects of the industry to research before making any decisions.