The market capitalization of a cryptocurrency is the amount of demand for the asset. Normally, the size of a market cap determines how strong a cryptocurrency is. The demand for an asset drives its price higher or lower depending on the direction of demand.
Higher demand leads to a higher price. In this context, it can be said that Bitcoin has a total demand of $120 billion, Ethereum has a $41 billion demand and Ripple has $16 billion.
Market capitalization is a well-known metric for traditional securities, but has unique implications in crypto. Market capitalization is a measure of the value of a security. It usually consists of multiplying the amount of outstanding stock shares by the current stock price.
In crypto, it’s defined as the circulating supply of tokens multiplied by current price. If a coin has 100 tokens outstanding and is trading for $10 a coin, it has a market cap of $1000. There are around 16.6 million bitcoins in existence, and the price is around $5600 at time of writing. Bitcoin’s market cap, therefore, is roughly $94 billion.
How to Calculate Cryptocurrency Market Cap
I want to cover the common misconceptions about market capitalization, price and the psychological impact that price has.
To begin, let’s define market capitalization…
Put simply, market capitalization is the price of an individual crypto asset multiplied by the circulating supply of that asset.
It is worth noting that the circulating supply is a variable and will more than likely increase over time.
I’ve created a maths triangle to help you calculate this going forward.
1. Price x Circulating Supply = Market Cap
2. Circulating Supply/Market Cap = Price
3. Market Cap/Price = Circulating Supply
While market cap is a good metric to guess how valuable a cryptocurrency is, there are several other factors that one must take into account. If you are looking to invest then please keep in mind that market cap is just one of the many tools out there. You should thoroughly research the projects that you are interested in and ask around to get a full knowledge of their growth potential. Knowing their market cap will only get you so far.
One of the biggest confusions people have is that the market cap reflects the actual dollar value that has been invested in the asset.
This is completely incorrect; the real number is far lower.
However, this is good news as it requires far less capital to move the cryptocurrency markets than one thinks.
Let me explain.
Bitcoin is priced at $10,000 USD with a circulating supply of 17 million. Using the triangle provided earlier, we can calculate the market cap by multiplying the price by the circulating supply.
$10,000 USD x 17,000,000 = $170 billion USD.
Suddenly the price of bitcoin shoots up to $11,000 USD, making the market cap 187 billion – an increase of 17 billion to the market cap.
This is where many people assume that $17 billion has just been added to the market, which is wrong.
In a buyers and sellers’ market, there needs to be sufficient sell volume to fill large bitcoin buy orders.
In other words, there needs to be a seller to match the buyer’s request. If there is no seller at that price point, the price will increase until there is sufficient volume to fill larger orders.
Where there is an imbalance, there is a reactionary movement in price in the market. When the market is bullish, there is a greater percentage of buyers than sellers, hence the price continues to rise.
In a bearish market this the opposite, sellers outweigh buyers and therefore cause the price to plummet.
If I am buying $10 million worth of bitcoin at $10,000 USD, there needs to be sufficient selling volume at that price level to fill my order.
If there is not, then the price will increase until my order is filled. So, a relatively small amount (compared to 17 billion) of $10 million can cause the market cap to climb by a much higher perceived dollar value than the actual investment. $10 million is more likely to move the price up by a couple hundred dollars. However, the effect on market cap would still be in the billions.