What Is Market Cap?

Market cap is a metric that can be used to determine the total value of a cryptocurrency. It’s calculated using a simple formula:

Market Cap = Current Price × Circulating Supply

This number helps investors compare the size of different cryptocurrencies. A higher market cap typically indicates the most established and widely adopted asset, while a lower market cap often means higher risk and volatility.

Take Bitcoin as an example:

• If the price of Bitcoin is $40,000 per BTC and the circulating supply is 19.5 million BTC, its market cap is $780 billion

• If a new small-cap crypto is priced at $1 per token but has 1 billion tokens in circulation, its market cap is only $1 billion.

Market cap offers a better valuation measure than price alone because it reflects the overall scale and impact of a cryptocurrency. A token priced at $0.10 might seem like a bargain, but if it has a circulating supply of 100 billion, its total valuation might be much higher than expected.

How Is Market Cap Calculated?

Let's break down how market cap is calculated for digital currencies.

• Circulating Supply: The number of coins currently available in the market (e.g., Bitcoin’s 19.5 million BTC in circulation).

• Total Supply: All coins created, even if they are locked or held in reserve. 

• Max Supply: The absolute limit of coins that will ever exist (Bitcoin has a max supply of 21 million BTC).

Some projects include locked or unreleased tokens in their valuation. A fully diluted market cap assumes all potential tokens are in circulation. For example, if a coin has a low circulating supply but a high total supply, its price may inflate temporarily before more tokens enter circulation.

Why Does Market Cap Matter to Investors?

Crypto market ranking heavily depends on market capitalization, shaping how traders and institutions assess assets.

Risk Assessment

A larger market capitalization often means greater stability, while small-cap crypto is more volatile and speculative. Investors seeking lower risk prefer large-cap cryptocurrencies, whereas risk-tolerant traders explore smaller assets for potential high returns.

Investor Confidence

Coins with a high market cap may attract institutional investors, reinforcing trust and legitimacy. Assets like Bitcoin and Ethereum dominate due to their strong market capitalization, making them safer choices for long-term holdings.

Market Trends and Growth Potential

Tracking total market capitalization helps identify bull and bear market cycles. Small-cap crypto often outperforms in Bull markets, while large-cap crypto holds value better during downturns, shaping investment strategies.

What Are the Categories of Crypto by Market Cap?

Not all crypto assets are created equal. They are grouped based on market capitalization into three categories:

Large-Cap Cryptocurrencies (Over $10B Market Cap) 

These include Bitcoin (BTC), Ethereum (ETH), and Binance Coin (BNB). Large-caps tend to be less volatile and are widely adopted. They’re often considered long-term investments due to strong liquidity and institutional backing.

Mid-Cap Cryptocurrencies ($1B - $10B Market Cap)

Portfolios include Solana (SOL) alongside Polkadot (DOT) and Chainlink (LINK). These digital assets may offer growth potential but also come with higher risk compared to large-cap assets. These cryptocurrencies serve primarily for the development of emerging blockchain applications like DeFi and NFT.

Small-Cap Cryptocurrencies (Under $1B Market Cap)

These include newer altcoins, meme coins, and niche blockchain projects. These are high-risk, high-reward assets with extreme price volatility, but some small-cap crypto tokens and smaller crypto assets are also included here.

Investors must evaluate their risk comfort and investment approach when selecting between big crypto assets, medium-sized crypto tokens, and smaller crypto assets.

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What Are the Limitations of Market Cap as a Metric?

Although market cap is a useful metric, it contains notable imperfections. Here’s why:

• Market Manipulation: The market capitalization of illiquid coins often gets artificially increased because of limited exchange activity. 

• Not a Profit Indicator: A high market capitalization does not guarantee profitability for a coin.

• Misleading Fully Diluted Market Cap: A misleading approach exists when projects include unreleased tokens in their market cap calculations to achieve inflated comparisons.

Successful investment decisions demand an assessment of market cap, trading volume, on-chain activity, and project fundamentals data.

How Does Market Cap Influence Crypto Investment Strategies?

Investors use market cap to structure their portfolios based on risk tolerance and market conditions.

Those who take minimal risk with their investments often choose large-cap cryptocurrencies because they provide stability and long-term security. A balanced crypto investment plan combines the benefits of mid-cap crypto and large-cap assets to generate moderate growth potential with safety precautions in place. 

High-risk traders typically deposit parts of their assets to small-cap cryptocurrency to obtain substantial gains though these investments feature elevated volatility.

The process of making investment choices depends heavily on a proper understanding of market trends alongside crypto price movements. The total market capitalization allows investors to evaluate industry health through its measurement of the total market value. 

Positive market sentiment grew when the market capitalization increased, but negative sentiment emerged when it decreased. 

Final Thoughts

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