Breaking Down one of the Most Used Terms in the Crypto Markets and What it Means for Individual Investors
One of the terms new investors hear thrown around a lot is “coin market capitalization,” but what exactly does that mean? Chances are, you’ve heard the term discussed when people are talking about the value or price of a certain cryptocurrency compared to other crypto assets in the space, but we’ll explain it in plain English and go over why it’s an important metric to analyze as an investor.
What is it and how do you Calculate It?
First things first: What is it? The term “market capitalization” is actually a borrowed phrase from the traditional stock market. In financial markets, it’s used to refer to the overall value of a security by calculating the total value of the shares as a whole in the market.
What we mean is that if you take a look at a company and their stock’s trading price, then multiply that price by the number of outstanding shares available, you’ll end up with a number that represents the total value of the company shares in the market. It’s actually pretty easy when you take a look at the formula. Traditional market capitalization can be found by using the formula below:
Market Capitalization = Price per share x Number of outstanding shares
Cryptocurrencies are pretty similar too. Instead of a regular market capitalization, or “market cap,” the cryptocurrency markets have what are called “coin market caps.” The coin market cap is like the traditional measure of value in the markets, but amended to reflect the value of a cryptocurrency rather than a stock price. Here’s the amended formula:
Coin Market Capitalization = Price per coin x Number of coins in circulation
Why Does it Matter?
So we know how to calculate coin market capitalization, great―that’s important; but now what? Why should I care? There are a variety of reasons to care, but we’ll talk about what is perhaps the single most important reason: potential.
Growth potential is incredibly important when evaluating a cryptocurrency and making decisions on investing. If we take a look at the coin market cap, it can tell us a lot about the future of a cryptocurrency. Everyone wants to think that their coin of choice could be “the next Bitcoin,” meaning the coin’s value could go from $.00021 to nearing $20,000 in a matter of years, but is that realistic? Forget realism, is that even possible? Well, yes and no, but coin market cap can tell us a lot about the chances of that happening.
When we look at the coin market cap of a particular asset, we’re looking at how much of the total value of the markets consists of that particular coin. If we take a look at Bitcoin, which currently has a coin market cap of around $157 billion, we can tell that it is certainly the big player in the markets. No other cryptocurrency is as well-known or influential as Bitcoin.
Then when we take a look at Ripple (XRP), which is currently ranked third by market capitalization at around $42 billion, we notice the price is much, much lower than the price of Bitcoin. But why does it have such a high coin market cap then?