Cryptocurrency Market Capitalization Explained
Market capitalization applies to the stock market and also to cryptocurrencies and blockchain projects, from which the current market value of the cryptocurrency or blockchain network in question can be seen.
The total market capitalization of the cryptocurrency industry as a whole is also an important indicator. In a sense, the total market capitalization can be used to assess the cumulative value of the blockchain and cryptocurrency industry.
Calculating the market capitalization of a cryptocurrency project is relatively simple. Most traders are keen to compare the market capitalization of individual projects, but market capitalization can actually be used to look at the big picture.
The total value of all cryptocurrency assets is much higher than that of Bitcoin or Ether, even if the market capitalization of the two major projects tops the list.
All major cryptocurrency data aggregators communicate the total market capitalization of the cryptocurrency market, so the metric is almost readily available. But what does this indicator mean? What can it reveal about the market? Read this article to find out.
What is the market capitalization of cryptocurrencies?
The current market value of a cryptocurrency network, often referred to as “market capitalization”, is calculated by multiplying the outstanding supply of cryptocurrency assets by the unit price.
Let’s assume there are two networks, AliceCoin and BobCoin, where AliceCoin has a total supply of 1,000 tokens, all of which are in circulation, and BobCoin is a proof-of-work chain with a supply cap of 100,000 coins, 60,000 of which are in circulation. 2 dollars. So, which token has a higher market capitalization?
Market Capitalization = Outstanding Supply × Price
Market capitalization of AliceCoin = 1,000 × 100 USD = 100,000 USD
BobCoin’s market capitalization = 60,000 × 2 USD = 120,000 USD
Even though the unit price of BobCoin is 50 times cheaper than AliceCoin, the value of the BobCoin network is still higher than that of AliceCoin, which is why the market capitalization is a better way to assess the value of the network than the unit price of the tokens.
What is the total market capitalization of cryptocurrencies?
The total market capitalization is the sum of the value of bitcoin, torrents, stablecoins, tokens, and all other cryptocurrency assets in the market combined. Many believe the metric is important as it presents a full picture of the size of the industry.
Total cryptocurrency market capitalization since 2013.
Due to the relatively high volatility of the cryptocurrency market, values tend to tumble. In the six and a half years since cryptocurrencies were first introduced, the total market capitalization never crossed the $20 billion mark. Since peaking at $770 billion in 2018, the market capitalization has fluctuated around $100 billion.
Why does the total market capitalization of cryptocurrencies matter?
Total cryptocurrency market capitalization is often used as a benchmark for comparison with other sectors in the macroeconomy. For example, many analysts often compare total cryptocurrency market capitalization to that of precious metals or stocks.
Why? Because this gives a rough estimate of how the entire cryptocurrency market will develop over the next few years or even decades.
However, no one knows what the best way to value cryptocurrencies and blockchain projects is. While these comparisons are useful, they should not be trusted blindly.
Putting different financial markets together and comparing them often turns out to be futile. This is because different sectors attract different types of investors. Stock traders, forex or precious metals speculators will not actively turn their attention to cryptocurrencies. Cryptocurrencies are a booming emerging asset class that will attract investors who share the same view.
Why is total cryptocurrency market capitalization misleading?
Making investment decisions with reference to the total market capitalization of cryptocurrencies can be misleading for a variety of reasons.
The first step is to ensure that the market valuation of each item is accurate, calculated by multiplying the supply by the price of each asset.
However, accurate supply information is difficult to ascertain. If that data is inaccurate, subsequent calculations are naturally untenable.
Second, the market value of some projects can be manipulated. They do so to create a false sense of security and inflate value. Focusing on the total market capitalization without a deeper look into its actual significance can lead to poor investment decisions.
At the end of the day, total market capitalization is just a value for a specific time period. This value could be in the hundreds of millions today, a billion next week, and fall to just a few tens of millions six months later. It reflects only a certain instantaneous state of the cryptocurrency industry.
Diluted Market Capitalization of Cryptocurrencies
There are several ways to calculate market capitalization, one of which is called “diluted market capitalization” to estimate the future value of a network. Let’s get to the bottom of it.
The term “diluted market capitalization” comes from the stock market. In the stock market, this value represents the valuation of a company after all of its stock options have been exercised and all of its securities have been converted into shares.
It is also important to look at the current and future supply of cryptocurrency assets. Not all cryptocurrencies, tokens and assets have reached their supply ceilings at the time of valuation.
For example, we know that the supply of bitcoins is capped at 21 million. As of today, there are 18.505 million bitcoins in circulation. At a unit price of around $10,550 per Bitcoin, the market capitalization is approximately $195.2 billion.
The diluted market capitalization is calculated using the bitcoin supply ceiling. Therefore, multiplying 21 million units by bitcoin’s current price of $10,550 works out to be bitcoin’s diluted market capitalization, which is about $221.5 billion.
The same concept applies to all cryptocurrency assets in the market. The diluted market capitalization is then equal to the current price of the asset multiplied by the maximum negotiable supply. This value cannot be used as a precise measure, given that asset prices are constantly fluctuating, but it can still be used to determine whether an asset is undervalued or overvalued.
Deflationary tokens
The circulating supply of many cryptocurrencies will grow year after year. In this case, the diluted market capitalization of cryptocurrencies will be higher than current, even if the price stays the same.
In addition, deflationary tokens are actively reducing the supply. There are various ways to handle this, one of which is token destruction, which will reduce the maximum future supply of a given asset.
If the value of the asset does not increase from year to year and the supply continues to decrease, then the market capitalization will be lower than current in the coming years.
For example, BurnCoin currently has a maximum supply of 20 million tokens with a unit price of $1 USD. However, the team decided to buy back and destroy tokens from the market, reducing BurnCoin’s maximum supply to 18 million.
After the announcement of the token destruction, the price of BurnCoin remained at $1. Depending on future token destruction, the diluted market value of the token is:
18 million BurnCoin x 1 USD = 18 million USD
However, at the moment of the announcement of the token’s destruction, its market capitalization is:
20 million BurnCoins x 1 USD = 20 million USD
In this case, the diluted market capitalization is actually lower than the current market capitalization. Keeping the above example in mind, there are many things that can happen between the announcement and the actual destruction of the tokens.
Even after the destruction, the price of tokens can go up and down. For deflationary tokens, where tokens are destroyed frequently, the diluted market capitalization is not an accurate indicator at all. Diluted market capitalization is similar to current market capitalization and can only be used as a general reference to estimate the future value of the asset.
Summarize
Cryptocurrency market capitalization is a key metric to keep an eye on, reflecting the up and down changes in value of the cryptocurrency industry as a whole. It can also be helpful to compare the current published market capitalization with the future movement of the diluted market capitalization.
At the same time, a number of other metrics should be considered; after all, market capitalization is only a small piece of the puzzle. It is important to look into other aspects of the cryptocurrency industry before making a financial investment.
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