UNDERSTANDING A CRYPTOCURRENCY’S MARKET CAP

On the heels of a meteoric bull run, the crypto markets now have a $170 billion market cap, an all-time high. That’s a big number. But what is market capitalization, why does it matter, and how can it help evaluate a coin? Within our premium, members-only Coinist Insiders Network, our job is to identify early stage cryptocurrencies with a high probability for success before there is any retail hype around them. We look at a coin’s market cap before we look at anything else. Below we’ll break down why market cap is such an important metric when analyzing cryptos.

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.

Traditionally, stocks and bonds have been analyzed via financial metrics and ratios. Measures like price-to-earnings ratio, earnings per share, the current ratio, earnings growth, and so on are used to examine stocks. However, crypto teams don’t publish financial statements, what metrics that do exist are all the more important Market cap provides a quick and easy check on how valuable a cryptocurrency is. Bitcoin is sitting at roughly $94 billion. Ethereum is the second-biggest, at $32 billion. Ripple ($10 billion, Bitcoin Cash ($5 billion), and Litecoin ($3 billion) round out the top 5.

You can learn a lot about crypto just by checking market caps. First things first: Bitcoin is still the big dog in town. With roughly 55% of the total crypto market cap, it remains far and away the most valuable coin, roughly three times as valuable as Ethereum. There is a huge gap between Bitcoin and Ethereum, but also a large gap between Ethereum and third-place Ripple. There are still relatively few valuable cryptocurrencies. Only 12 coins have a total market cap of over $1 billion. It’s not uncommon for popular altcoins to have market caps of under $20 million. Most of crypto’s market cap remains tied up in Bitcoin and a few other big names.

Bitcoin’s $94 billion market cap is huge in a vacuum, but let’s pit it against some other big names. Bitcoin just jumped Goldman Sachs and its $92 billion market cap. However, it’s got a long way to go. JP Morgan, whose CEO Jaime Diamon has publicly bashed Bitcoin, is sitting at around $324 billion. Facebook is around $500 billion, and Apple is leaps and bounds ahead at $811 billion. So Satoshi’s brainchild has a long way to go before taking over the world.

A high or low market cap can reveal a coin that is resistant to volatility, or vulnerable. Coins with small market caps consequently rock more when big news hits the market, or “whales” (large buyers) take positions. That isn’t inherently surprising – the crypto markets are among the most volatile the world has ever seen. But holders of tokens with small market caps are at risk of being crushed by larger traders. If several whales conspire to sell at the same time, the price of a token can crash to nothing instantly. This would be much tougher with Bitcoin and Ethereum, which have large market caps and are not easily manipulated.

There’s more than meets the eye with market cap for another reason. A market cap is merely a number reflecting the amount of circulating coins and their price. It can’t account for who is holding those coins, be it a whale or a developer. As we mentioned, a large token holder can hugely influence the price of a coin. As well, some tokens have taken flack for developers holding large amounts of coins. If development teams hold large amounts of coins, they can retain control over the direction of the token, while presenting the appearance of a coin with a healthy market cap. RIpple, before its recent bull run, was attacked for this.

Bitcoin and Ethereum broke into mainstream news this year with the massive increases of their respective market caps. They, and the third coin on Coinbase, Litecoin, have all seen a boost recently. Coinbase announced customers with US bank accounts would be able to make instantaneous purchases, which was previously limited. All three coins saw a boost in their respective market caps with this news.

A market cap is both a quick way to gauge a coin’s value, and a more than it seems. A healthy market cap is indicative of a strong coin, but developers or whales holding coins can mislead. Always weigh market cap with some of the other metrics we cover before making an investment decision.