Crypto Market Capitalization Explained

Introduction

Calculating the market capitalization of cryptocurrency projects is relatively straightforward. While many traders are keen to compare the market caps of individual projects, this metric can also provide a more macro perspective.

In fact, the total value of all cryptocurrency assets far exceeds that of Bitcoin or Ethereum, even though these two projects hold the top spots in terms of market capitalization. Major cryptocurrency data aggregators provide the total market cap of the cryptocurrency market, making this metric readily accessible. So, what does this metric really mean? What market insights can it reveal? Let’s explore further.

What is Cryptocurrency Market Capitalization?

The current market value of a cryptocurrency network is commonly referred to as "market capitalization," calculated by multiplying the circulating supply of the cryptocurrency by the price of a single token.

For example, suppose there are two networks: AliceCoin and BobCoin. AliceCoin has a total supply of 1,000 tokens, all of which are in circulation. BobCoin is a proof-of-work chain with a supply cap of 100,000 coins, of which 60,000 are currently in circulation. AliceCoin's current market price is $100, while BobCoin's price is $2. Which token has a higher market cap?

The formula for calculating market cap is:

Market Cap = Circulating Supply × Price

AliceCoin's market cap = 1,000 × $100 = $100,000

BobCoin's market cap = 60,000 × $2 = $120,000

Despite BobCoin's price being 50 times cheaper than AliceCoin, the overall value of the BobCoin network is still higher than that of AliceCoin. This illustrates why market cap is a more effective measure of network value than the price of a single token.

What is the Total Market Capitalization of Cryptocurrency?

Total market capitalization refers to the sum of Bitcoin, altcoins, stablecoins, tokens, and all other cryptocurrency assets in the market. Many consider this metric to be crucial as it provides a comprehensive view of the industry's scale.

Since 2013, the fluctuations in total cryptocurrency market capitalization are as follows: According to data from CoinMarketCap, despite significant volatility in the market, values often fluctuate dramatically. In the first six and a half years since the inception of cryptocurrencies, the total market cap never surpassed the $20 billion mark. After reaching a peak of $770 billion in 2018, the total market cap has fluctuated around the $100 billion range.

Why is Total Cryptocurrency Market Capitalization Important?

The total market capitalization of cryptocurrencies is often used as a benchmark for comparison with other macroeconomic industries. For instance, many analysts compare the total market cap of cryptocurrencies to that of precious metals or the stock market.

This approach helps us roughly estimate the future potential of the cryptocurrency market over the coming years or even decades.

However, there is currently no definitive best method for evaluating cryptocurrency and blockchain projects. While these comparisons hold some value, they should not be blindly relied upon.

Comparing different financial markets often yields futile results, as the types of investors attracted to each industry vary. Stock traders, forex speculators, or precious metal investors may not actively monitor cryptocurrencies. As an emerging asset class, cryptocurrencies attract investors who share similar views and beliefs.

Why Total Cryptocurrency Market Capitalization Can Be Misleading

Relying solely on the total market capitalization of cryptocurrencies when making investment decisions can lead to misconceptions for several reasons.

First, it is crucial to ensure that each project's market valuation is accurate, which is typically calculated by multiplying the supply by the price of each asset. However, obtaining accurate supply information is often challenging. If this data is inaccurate, subsequent calculations are rendered meaningless.

Second, the market cap of some projects can be manipulated. Certain projects may use this tactic to create a false sense of security and inflate their perceived value. Focusing solely on total market cap without understanding its actual implications may result in unwise investment decisions.

Finally, total market cap is merely a figure at a specific point in time. This number may be in the hundreds of millions today, reach a billion next week, and fall to just a few tens of millions six months later. It only reflects the state of the cryptocurrency industry at a particular moment.

Diluted Market Capitalization

There are various methods for calculating market capitalization, one of which is "diluted market capitalization," a way to estimate the future value of a network. Let’s delve into this concept.

The term "diluted market capitalization" originates from the stock market, representing a company's valuation after all stock options are exercised and all securities are converted into shares.

It is also important to consider both the current and future supply of cryptocurrency assets, as not all cryptocurrencies have reached their supply caps at the time of valuation.

For example, Bitcoin has a supply cap of 21 million coins. Currently, there are 18.505 million Bitcoin in circulation. At a price of approximately $10,550 per Bitcoin, its market cap is about $195.2 billion.

When calculating the diluted market cap, the supply cap of Bitcoin is used. Thus, multiplying 21 million by the current price of $10,550 gives a diluted market cap of approximately $221.5 billion.

The same principle applies to all cryptocurrency assets in the market. The diluted market cap equals the current price of the asset multiplied by the maximum circulating supply. Although this value may not serve as an exact measure due to asset price fluctuations, it can still help determine whether an asset is undervalued or overvalued.

Deflationary Tokens

The circulating supply of many cryptocurrencies increases year by year. In such cases, even if the price remains constant, the diluted market cap may exceed the current market cap.

Conversely, deflationary tokens actively reduce supply through various means, one of which is token burning, which lowers the future maximum supply of a specific asset.

If the asset's value does not increase year by year while the supply continues to decrease, the market cap in the coming years will be lower than the current one.

For example, consider BurnCoin, which has a maximum supply of 20 million coins, currently priced at $1. Suppose the team decides to buy back and burn tokens, reducing the maximum supply to 18 million coins.

After the announcement of the token burn, if BurnCoin's price remains at $1, the diluted market cap would be:

18 million BurnCoin × $1 = $18 million.

However, at the time of the burn announcement, its market cap was:

20 million BurnCoin × $1 = $20 million.

In this case, the diluted market cap is actually lower than the current market cap. It is important to note that many changes may occur between the announcement of the news and the actual burning of tokens.

Even after burning, the token price may fluctuate. For deflationary tokens that frequently engage in token burns, diluted market cap is not an exact indicator. Similar to current market cap, it can only serve as a rough reference for predicting the future value of the asset.

Conclusion

Cryptocurrency market capitalization is an important indicator that reflects changes in the overall value of the cryptocurrency industry. Comparing current market cap with future trends in diluted market cap can also be quite helpful.

At the same time, other metrics should be considered, as market cap is just one aspect of the broader financial landscape.

Risk Warning

While the cryptocurrency market offers significant growth potential and innovation opportunities, it also carries a high level of market risk and price volatility. The value of crypto assets can fluctuate dramatically in a short period, potentially leading to substantial financial losses for investors. Additionally, the cryptocurrency market faces multiple risk factors, including technical risks, legal and regulatory uncertainties, cybersecurity threats, and market manipulation. We strongly advise users to conduct thorough research and due diligence before making any investment decisions and to consult professional financial advisors. All investment decisions are made at the user’s own risk. Thank you for your trust and support of Venkate!

Building The Future of Crypto Exchange

Where Meet a Confluence of Inspiration and Innovation

Venkate Exchange is an innovative cryptocurrency trading platform, drawing its name and inspiration from Venkateswara—a deity symbolizing wealth and prosperity in Indian mythology.