Cracking crypto trading is a difficult task. However, the journey of a thousand miles starts with a single step. Following the same rule, cryptocurrency investors have to start with the fundamentals and keep building upon their knowledge. Crypto market cap is such a fundamental metric that is the central theme of this article.
What is Crypto Market Capitalization?
Cryptocurrencies can have a finite or infinite total supply. However, every cryptocurrency has an aggregate circulatory supply at any given time. Circulatory supply means the total amount of cryptocurrencies that are available for active trading.
Market Capitalization is the representation of the current market value of a cryptocurrency multiplied by its existing total circulatory supply. In simple words, the product of total crypto units available in the market and its spot price is called its Market Capitalization or market cap.
How to Calculate Crypto Market Capitalization?
The formula for calculating cryptocurrency market cap is straightforward forward given as under:
XYZ Coin market cap = Circulatory supply x current market value
Since the calculation of market cap is very easy, this metric is often readily available on various online websites and analytics. CoinMarketcap and CoinGecko are two top cryptocurrency data aggregators that offer universally accepted and updated crypto market cap statistics.
Another important aspect to consider here is that market value and circulatory supply are directly proportional to the total market cap. It means that a cryptocurrency with a bigger value of either circulatory supply or market value in comparison to others will have a higher market cap.
What is Total Crypto Market Capitalization?
Cryptocurrency investors often examine the individual market cap for virtual assets that they are planning to sell or purchase. However, financial market analysts may also take a look at the overall or total crypto market cap that accounts for all cryptocurrencies.
In this case, the total crypto market cap represents the summation of all cryptocurrency units and the total market value of every crypto variant multiplied.
The total market cap encompasses all types of cryptocurrencies such as stablecoins, utility tokens, coins, governance tokens, altcoins, and others. Overall bullish and bearish trends can impact the aggregate crypto market cap therefore this metric can keep fluctuating.
Should You Trust Crypto Market Cap?
Crypto market caps both individual and overall are important metrics. However, it is not very wise to base your trading decisions solely on these metrics alone. Here are some important reasons that make crypto market cap unreliable:
It can be a real challenge to collect accurate and precise circulatory supply data. The process can take a lot of time and effort and there is no guarantee to check if the results are accurate.
There are complexities in the cryptocurrency market such as order spoofing, peer-to-peer trading, cold storage, and whale trading that can make it impossible to determine the accurate circulatory supply data.
It is also a challenge to ascertain the accurate market value of a given cryptocurrency since they are mostly traded on secondary exchanges. Furthermore, the price of a given cryptocurrency within a DeFi liquidity pool can differ from other similar spaces on account of trading expenses, gas, and natively available supply.
What is Diluted Crypto Market Capitalization?
Diluted crypto market cap is a term derived from the traditional stock market to describe a scenario where all securities are converted into stocks and all stock options are utilized.
It is important to note that the circulatory supply of a cryptocurrency does not equal its total supply. There are many cases where the total supply of a cryptocurrency is either infinite or new tokens are minted over time.
It means that if the market cap of a cryptocurrency is the product of circulatory supply and current market value, the diluted crypto market cap is represented by multiplying the total supply of a cryptocurrency by its currency market price.
For example, if the total supply of XYZ token is 1000 coins, its circulatory supply is 100, and the current market value is $10. The market cap of XYZ will be 100 x $10= $1000. Meanwhile, its diluted market cap will be represented as 1000 x $10 = $10,000.
What are Deflationary and Inflationary Cryptocurrencies?
If the total circulatory supply of a given cryptocurrency decreased over time it is called a deflationary token. On the contrary, if its circulatory supply continues to grow with time it is called inflationary. To control their total circulatory supply, blockchains incorporate the burning mechanisms that send a given number of new cryptocurrencies to burn addresses over time.
Contrary to the common perception, the crypto market cap is an important metric. It is used as a reference point to measure the historical growth or decline of a given cryptocurrency over time.
Furthermore, it is also used as a base value in important crypto market metrics such as market cap ratio, moving averages, relative strength index, Bollinger bands, and many more.