Understanding Market Cap
One of the first and most important concepts crypto beginners must understand is ‘Market Capitalization’. It will be difficult to navigate the crypto world without grasping this concept as it is one of the most commonly used methods of evaluating the size of a crypto project. Market cap is what we use to estimate the current value of a Crypto-Currency, but it is also used as a tool for predicting the upside potential that your investment has.
How to calculate Market Cap
The ‘Market Capitalization’, or ‘Market Cap’, of an asset is its trading price, (in the case of crypto this is the price of one token), multiplied by its total circulating supply. So, Market Cap = price of one coin x circulating supply
Bitcoin currently has a trading price of roughly $40,000 per $BTC and there are currently roughly 18,500,000 $BTC ($18.5 million) in circulation. Therefore the Market Cap of Bitcoin is $740,000,000,000 ($740 billion).
How to use Market Cap as a trading tool
Market Cap can be a great way of determining the potential of a crypto project. The lower the market cap of a crypto-currency the less money (inputed into the crypto in total) required to multiply your investment. If A has an initial market cap of $5 and B has an initial market cap of $10, for A to be worth 2x more than it is initially it would require a growth of $5 in market cap, whereas for B to 2x it would require a growth of $10. So, it is harder for B to 2x than A. Understanding this principle can help you make money in crypto because it shows you that pursuing low market cap cryptos can offer the greatest returns. Market cap is a great way of determining the theoretical ‘ceiling’ of a crypto-currency. Comparing the market caps of similar crypto projects (i.e. projects tackling similar issues, e.g. comparing insurance cryptos to other insurance cryptos, or storage coins to other storage coins) you can estimate the future potential value of a crypto-currency.
Currently Gold has a market cap of $12 trillion, if you believe that Bitcoin is the ‘digital gold’, and that it will challenge Gold as the primary store of value/hedge against inflation, then a realistic ceiling for Bitcoin is a market cap of $12 trillion. Therefore, for Bitcoin to be of equivalent value to Gold, Bitcoin would have to grow by over sixteen times what it is worth now. This would make 1 $BTC worth roughly $640,000. ($640,000 x $18,500,000 = $12 trillion) (price of one coin x circulating supply = Market Cap)
Furthermore, if you believe that Bitcoin has properties which make it better than gold (as a store of value/hedge against inflation etc…) Bitcoin’s market cap could theoretically even surpass that of Gold’s.
Common Beginner Mistake
One of the most common mistakes crypto beginners make is focusing too much on a crypto-currencies trading price rather than its Market Cap. The trading price of a crypto does not tell you much that is relevant to your investment.
The trading price of $DOGE is $0.40 and the trading price of $LINK is $31. Many beginners will assume that they are earlier to $DOGE and that it is a better investment because the coin is cheaper. In actual fact $DOGE has a market cap of $56 billion compared to $LINK which has a market cap of $13 billion, meaning that $DOGE is already over 4 times larger than $LINK. Therefore, it will require less money inputed into $LINK for it to do 2x than for $DOGE to do 2x.
Market Cap vs Fully Diluted Market Cap
It is important to understand the difference between standard ‘Market Capitalization’ and ‘Fully Diluted Market Capitalization’. The difference is fairly simple. Market cap is calculated using the circulating supply of a token. Diluted Market Cap is calculated by using the total supply of a token.
The Market Cap of Bitcoin is $740 billion, whereas the Diluted Market Cap of Bitcoin is $840 billion. This is because the total supply of Bitcoin is 21 million $BTC but the circulating supply is only roughly 18 million $BTC. (For more info on why the circulating supply is different from the total supply look out for future articles)
How to find undervalued Alt-Coins using Market Cap
Live Nation Entertainment Inc. (LYV), the parent organisation of Ticketmaster has a market cap of $19 billion, this can be used as a realistic ceiling for other ticketing companies. Of course, this is not a realistic ceiling for all rival ticketing companies. But for ticketing companies who are innovative and objectively better, this can act as a good indication of the size of the relevant market and clearly absorbing even a small percentage of the market share from Ticketmaster can be extremely lucrative for competing companies and investors.
The blockchain alternative to standard ticketing services is NFT ticketing, developed by Get Protocol. Get Protocol has a utility token called $GET, which currently has a market cap of only $70 million. This is more than 100x less than that of Live Nation Entertainment Inc. For more info on $GET check out this great article.
Market Cap is a great investment tool to have at your disposal, but it has its limitations. The way we determine which Crypto-Currencies to invest in involves utilising Market Cap, but also a host of other principles. We will soon be publishing our full Alt-Coin investment strategy, which will outline all the other tools that we use. More in depth breakdowns of these crypto investment tools will happen in articles such as this one. Have a look at what we hold in our crypto portfolio here, follow us on Twitter for up to date Crypto News and Alt-Coin Clues, and find more of our introduction to crypto articles here.
This article is not sponsored in any way. Our income comes only from donations, so we don’t depend on anyone. Read more about our journalistic values and how you can support our mission.
Nothing on Cryptinus constitutes professional and/or financial advice. Always think for yourself and make sound decisions when investing. Never invest money that you can’t afford to lose.