Summary
Market capitalization applies to cryptocurrencies and blockchain projects as well as the stock market, and it tells you the current market value of the relevant cryptocurrency or blockchain network.
The total market capitalization of the entire cryptocurrency industry 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.
Introduction
Calculating the market cap of a cryptocurrency project is relatively simple. Most traders are interested in comparing the market cap of individual projects, but market cap can also be used to see the bigger picture.
The total value of all crypto assets is much higher than Bitcoin or Ethereum, even though those two projects top the list by market cap.
All major cryptocurrency data aggregators report the total cryptocurrency market capitalization, so this metric is pretty much readily available. But what does this metric mean? What does it tell you about the market? Read this article to find out.
What is the cryptocurrency market cap?
The current market value of a cryptocurrency network is often referred to simply as “market cap” and is calculated by multiplying the circulating supply of the cryptocurrency asset by its unit price.
Suppose there are two networks, AliceCoin and BobCoin. AliceCoin has a total supply of 1,000 coins, 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 in circulation. AliceCoin currently has a market cap of $100, while BobCoin has a market cap of $2. So, which coin has a higher market cap?
Market Cap = Circulating Supply × Price
AliceCoin market cap = 1,000 × 100 USD = 100,000 USD
BobCoin market cap = 60,000 × 2 USD = 120,000 USD
Even if the price per coin of BobCoin is 50 times cheaper than AliceCoin, the value of the BobCoin network is still higher than AliceCoin. This is why market capitalization is a better way to assess the value of a network than the price per coin.
What is the total market capitalization of cryptocurrencies?
Total market capitalization is the sum of the value of Bitcoin, altcoins, stablecoins, tokens, and all other crypto assets in the market. Many believe that this metric is important because it gives a complete picture of the size of the industry.
Total cryptocurrency market capitalization since 2013. Source: CoinmarketCap.
Due to the relatively high volatility of the cryptocurrency market, the value often fluctuates. In the first six and a half years of cryptocurrency, the total market value has never crossed the $20 billion mark. Since reaching a peak of $770 billion in 2018, the market value has been fluctuating around $100 billion.
Why is the total market capitalization of cryptocurrencies important?
The total cryptocurrency market capitalization is often used as a benchmark for comparison with other sectors in the macroeconomy. For example, many analysts often compare the 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 in the next few years or even decades.
However, no one knows the best way to value cryptocurrencies and blockchain projects. While these comparisons are useful, they should not be trusted blindly.
Comparing different financial markets together is often futile. This is because different sectors attract different types of investors. Stock traders, foreign exchange or precious metals speculators will not actively turn their attention to cryptocurrencies. Cryptocurrencies are a thriving new asset class that will attract investors who share the same view.
Why is the total cryptocurrency market capitalization misleading?
There are many reasons why using the total market capitalization of cryptocurrencies to make investment decisions can be misleading.
The first step is to ensure that the market valuation of each project is accurate, which is calculated by multiplying the supply by the price of each asset.
However, accurate supply information is difficult to determine. If the data is inaccurate, subsequent calculations will naturally be untenable.
Secondly, the market cap of some projects can be manipulated. They do this to create a false sense of security and inflate the value. If you only focus on the total market cap without delving into its actual significance, you may make wrong investment decisions.
Ultimately, the total market capitalization is just a value for a specific period of time. This value may be hundreds of millions today, billions next week, and only tens of millions six months later. It only reflects the state of the cryptocurrency industry at a certain moment.
Diluted market capitalization of cryptocurrencies
There are many ways to calculate market cap, but one way to estimate the future value of a network is called “diluted market cap.” Let’s demystify it.
The term "diluted market capitalization" comes from the stock market, where it represents the company's valuation after all stock options have been exercised and all securities have been converted into stock.
It is also important to pay attention to the current and future supply of crypto assets. Not all cryptocurrencies, tokens, and assets have reached their supply caps at the time of valuation.
For example, we know that the supply of Bitcoin is capped at 21 million. As of today, there are 18.505 million Bitcoins in circulation. At a price of around $10,550 per Bitcoin, the market cap is approximately $195.2 billion.
The diluted market cap is calculated using the maximum supply of Bitcoin. Therefore, multiplying 21 million by the current price of Bitcoin, $10,550, gives the diluted market cap of Bitcoin, which is approximately $221.5 billion.
The same concept applies to all crypto assets on the market. Diluted market cap is simply the current price of the asset multiplied by the maximum tradable supply. Given that asset prices fluctuate constantly, this number cannot be used as an exact metric, but it can still be used to determine whether an asset is undervalued or overvalued.
Deflationary Tokens
Many cryptocurrencies have a circulating supply that grows year over year. In this case, even if the price remains constant, the diluted market cap of the cryptocurrency will be higher than it is today.
Additionally, deflationary tokens are actively reducing their supply. This can be done in a number of ways, one of which is token burning, which will reduce the maximum future supply of a particular asset.
If the value of the asset does not increase year by year and the supply continues to decrease, then the market value in the next few years will be lower than it is today.
For example, the current maximum supply of BurnCoin is 20 million tokens at a unit price of $1. However, the team decided to buy back and destroy tokens from the market, reducing the maximum supply of BurnCoin to 18 million.
After the announcement of the token destruction, the price of BurnCoin is still $1. Based on the future token destruction, the diluted market value of the token is:
18 million BurnCoins x 1 USD = 18 million USD
However, at the time of the token destruction announcement, its market value was:
20 million BurnCoins x 1 USD = 20 million USD
In this case, the diluted market cap is actually lower than the current market cap. Keep in mind in the above example, a lot can happen between the announcement and the actual token burn.
Even after destruction, token prices will still fluctuate. For deflationary tokens that frequently destroy tokens, diluted market cap is not an accurate indicator at all. Diluted market cap is similar to current market cap and can only be used as a rough reference to estimate the future value of an asset.
Summarize
Cryptocurrency market cap is a key metric to watch, as it reflects the ups and downs in value across the cryptocurrency industry. It can also be helpful to compare the current published market cap to where the diluted market cap is headed.
At the same time, some other indicators should be considered. After all, market capitalization is only a small piece of the puzzle. Financial investment can only be made after studying other aspects of the cryptocurrency industry.