TL;DR

Market capitalization applies to stock markets as well as cryptocurrencies and blockchain projects. It tells us the current market value of a particular cryptocurrency or blockchain network.

An equally important indicator is the total market capitalization of the entire crypto industry. In a sense, it can be used as an estimate of the total value of all blockchains and cryptocurrencies in the industry.

Introduction

Calculating the market capitalization of a cryptocurrency project is relatively simple. While most stakeholders will compare the market capitalization of individual projects, it can also be useful to keep an eye on the big picture.

The total value of all crypto assets is much greater than the value of just Bitcoin or Ethereum, despite these being the two largest projects by their individual market capitalization.

The total capitalization of cryptocurrencies is reported by all leading aggregators, which makes it relatively easy to track this indicator. But what does it mean and what can it tell us about the market? Let's find out.

What is crypto market capitalization?

Market capitalization, often shortened to “market cap,” is the current market value of a cryptocurrency network. It is calculated by multiplying the number of crypto assets in circulation by the price of the corresponding asset.

Let's say we have two networks, AliceCoin and BobCoin. AliceCoin has a total supply of 1,000 coins, all of which are in circulation. BobCoin implements the Proof of Work algorithm and currently has 60,000 coins out of 100,000 in circulation. The current market price of AliceCoin is $100 and BobCoin is $2. Which coin has a higher market capitalization?

Market capitalization = supply × price

AliceCoin Capitalization = 1,000 × $100 = $100,000

BobCoin capitalization = 60,000 × $2 = $120,000

Even though BobCoin is 50 times cheaper than AliceCoin, its network cost is still higher than AliceCoin. This is why market capitalization is a better reflection of the value of the network than just the price of an individual coin.

What is the total market capitalization of cryptocurrencies?

Total market capitalization reflects the total value of Bitcoin, altcoins, stablecoins, tokens, and all other crypto assets in the market combined. This indicator is considered important because it indicates the size of the industry as a whole.

Total cryptocurrency market capitalization since 2013. Source: CoinmarketCap

Due to the relatively high volatility of cryptocurrency markets, capitalization values ​​tend to fluctuate. During the first six and a half years of cryptocurrencies' existence, the total market capitalization did not exceed $20 billion. Since its last peak of $770 billion in 2018, it has fluctuated in the hundreds of billions.

What is the total capitalization of cryptocurrencies used for?

The combined cryptocurrency market capitalization is often used as a basis for comparison with other sectors of the economy. For example, many analysts compare the overall market capitalization of cryptocurrencies with the market capitalization of precious metals or stocks.

Why do they do this? This characteristic provides a rough estimate of where and how the crypto market may grow in the coming years and decades.

However, no one knows how best to estimate the value of cryptocurrencies and blockchain projects. These comparisons can be useful, but they should not be blindly trusted.

Comparing different financial markets is often futile. Different industries attract different types of investors. Cryptocurrency will not by default attract stock traders, currency traders and precious metals speculators. Cryptocurrencies are a new and thriving asset class and should be treated as such.

Why might the total crypto market capitalization be inaccurate?

Making financial decisions based solely on the overall crypto market capitalization can be misleading for many reasons.

First, it is necessary to correctly calculate the market valuation of each project separately. To do this, you need to take the total supply and multiply it by the price of the asset.

But it can be difficult to find out reliable information about the offer. If this data is incorrect, then all further calculations automatically become incorrect.

Secondly, the market capitalization of some projects can be manipulated. Some projects do this to convey a false impression of security and value. Looking only at overall market capitalization without asking what it actually means will lead to potentially dangerous financial decisions.

At the end of the day, total market capitalization is simply a number that is relevant at a specific point in time. It could be nine figures today, nine figures next week and eight figures in 6 months. It represents only a snapshot of the cryptocurrency industry at a certain time.

Diluted market capitalization of cryptocurrencies

There are several ways to calculate market capitalization. One way to assess the potential value of a network is by diluted market capitalization. Let's look at what it is.

The term "diluted market capitalization" comes from the stock market. There, this figure represents the company's valuation when all stock options are exercised and all securities are converted into shares.

It is also important to keep in mind the current and future supply of crypto assets. Not all cryptocurrencies, tokens and assets are currently fully issued.

For example, we know that there will be a maximum of 21 million Bitcoins. Today there are 18.505 million Bitcoins in circulation. This equates to a market capitalization of approximately $195.2 billion at a price of approximately $10,550 per BTC.

Instead, the maximum number of Bitcoins will be taken into account when calculating the diluted market capitalization. So we take 21 million and multiply it by the current BTC price of $10,550. This amount results in Bitcoin's diluted market cap being approximately $221.5 billion.

This principle can be applied to all other crypto assets on the market. Diluted market capitalization is the current price of an asset multiplied by its maximum supply that will ever be outstanding. Given that asset prices will fluctuate, this is by no means an accurate indicator. However, it can help determine whether an asset may be undervalued or overvalued.

Deflationary tokens

The circulating supply of many cryptocurrencies increases over time. In such cases, the capitalization of the diluted crypto market will be higher than today, even if the price remains the same.

At the same time, there are deflationary tokens, the supply of which is actively declining. This is done in a variety of ways, one of which is a process known as coin burning. It reduces the future maximum volume of a specified asset.

If the value of an asset does not increase over time and its supply decreases, then the diluted market capitalization in the future may be lower than it is today.

Here's an example: BurnCoin has a current maximum supply of 20 million tokens at $1 per coin. But the team decides to buy tokens from the market and burn them, reducing the maximum supply to 18 million BurnCoin.

After the burn announcement, the price of BurnCoin remains at $1. Knowing the burn, we can calculate the diluted market cap:

18 million BurnCoin x 1 dollar = 18 million dollars

However, at the time of the burn announcement, the market capitalization is:

10 million BurnCoin x 1 dollar = 20 million dollars

In this case, the diluted market capitalization is actually lower than the current one. The example above shows that a lot can happen between the announcement and the actual burning of the coin.

Even after burning, the price can still go up or down. Diluted market cap, especially for deflationary tokens with active coin burns, is an imprecise metric. You may think of it as a snapshot, like the current market capitalization, but it is actually an attempt to estimate future value.

Conclusion

The market capitalization of cryptocurrencies is one of the important indicators to keep an eye on. It reflects the ebb and flow of the entire cryptocurrency industry. It is also useful to distinguish between current capitalization and diluted capitalization, which shows future capitalization.

At the same time, it is important to take other indicators into account. Market capitalization is only part of the puzzle. There are other aspects of the industry that need to be examined before making any financial commitment.