Market capitalization, or market cap, is a metric that estimates the total value of a project. While market cap has a whole range of potential uses for investors, people often assume it measures how much money is invested in a project.
In fact, market cap is a growth measure, or to track characteristics like volatility and project size. Let’s break down how it’s calculated and how it can be used to make wiser investments.
Market Capitalization Insights
This metric is calculated by multiplying the current market price and the circulating supply of a cryptocurrency. Circulating supply is the number of coins or tokens held by investors and currently available to purchase.
Market cap = Current price x Circulating supply
For example, at the time of writing, Bitcoin has a circulating supply of 18,692,881 BTC and a price of $57,790. So, Bitcoin’s market cap is:
18,692,881 BTC x $ 54,790.98 / BTC = $ 1080.3 Billion
The main reason that market cap doesn’t tell you how much money is invested in a project is because it measures the value of a cryptocurrency based on the average price per asset. So if price of BTC increased to $100,000 the market cap would hit $1869.3 Billion. But this would not mean an additional $789 billion had been invested.
Market Cap as a Measure for Riskiness
So what can market cap tell us? Let’s say we have a bearish market where the market cap falls 10% for all cryptocurrencies. BTC has a market cap of $ 1.02 Trillion and ADA, one of the top 10 cryptocurrencies, has a market cap of $ 40.2 Billion:
| Asset | Market cap ($) | 10% of market cap ($) |
|---|---|---|
| BTC | 1016.6 Billion | 102 Billion |
| ADA | 40.2 Billion | 4.02 Billion |
For the value to go down 10%, BTC needs to decrease $ 102 Billion in size while ADA $ 4.02 Billion. That’s 25 times higher. This means it’s 25x easier for ADA to change its price compared to BTC, which would have to shed much more value from its price.
Because ADA has a smaller market cap, it is riskier than BTC. And as any investor knows: the riskier the asset, the bigger the potential gains.
Market Capitalization Strategies
Now that you’re aware of what market cap is, let’s talk about how this metric fits into some strategies that allow you to make wiser investments.
Analyze Potential Growth
Are you wondering how to find hidden gems that generate 10x gains in one year? Sound fishy, but if you think a project is worth investing in, compare its x10 gains market cap to BTC. This way, you can determine if the growth you’re looking for is realistic.
| Asset | Current price ($) | x10 price ($) | Market cap ($ in Billion) | x10 gains Market cap ($ in Billion) | x10 gains vs BTC market cap** (%) |
|---|---|---|---|---|---|
| BTC | 54,384 | — | 1016.6 | — | — |
| ETH | 2716.81 | 27168.1 | 314.2 | 3142.1 | 309.1 |
| ADA | 1.3 | 13.0 | 41.5 | 415.3 | 40.9 |
| CAKE | 35.88 | 358.8 | 5.7 | 57.0 | 5.6 |
| UNI | 42.68 | 426.8 | 22.3 | 223.4 | 22.0 |
As you can see on the table, if we compare the BTC market cap with each asset, we get a general picture of its growth potential.
For example, if you want to make x10 gains with ETH in one year, it sounds too optimistic because its market cap should increase 309% of the BTC market cap. Think about it. According to companiesmarketcap.com, the total market cap of the top 4840 companies in the world is only $ 90.5 Trillion. You’re asking ETH to be almost 35 times that!
On the other hand, we have CAKE, which only needs to grow by 5.6% of the BTC market cap to achieve a 10% price increase. Therefore, CAKE has greater potential for making x10 gains within a year.
Comparing the potential for market cap growth with the actual market cap of the largest crypto asset can help you identify assets destined for a large price increase. But remember, any coin with potential for huge growth based on market cap analysis could quickly lose value too.
Creating Indexes
You can also create indexes to compare the performance of different coins according to market cap. ACCOINTING.com uses this method to track the performance of assets in the app’s lists feature. It consists of a weighted average based on the coins’ market cap that you want in the index. This way, all assets are treated equally regardless of their market cap size.
Weight of asset (Wi) = Market capi / sum of all market cap
Index =sum of Current pricei x Wi
For example, if you want to make an index of the top 3 cryptocurrencies, it goes as follows:
| Asset | Current price ($) | Market cap ($) | Weight ( Wi ) |
|---|---|---|---|
| BTC | 54,384 | 1,016,639,241,081 | 0.72 |
| ETH | 2716.81 | 314,213,472,876 | 0.22 |
| BNB | 560.9 | 85,576,998,910 | 0.06 |
Top 3 index = 0.72 x 54,384 + 0.22 x 2716.81 + 0.06 x 560.9
Top 3 index = $ 39,671
In other words, BTC will impact the index more than ETH and BNB because its market cap is greater than the others. The “impact” is reflected by weights. The higher the weight, the higher the impact on the index.
If you want to outperform the top 3 index, you’ll need to change your portfolio weights. For example, in the image above, I have created a portfolio weighted according to market cap using the Accointing app.
Here, the asset with the smallest market cap makes up the biggest share of the portfolio because it has the greatest potential for gains. The lower the market cap, the higher the weight.
As you see, the market cap is a powerful metric that allows investors to develop creative strategies by identifying high-risk cryptocurrencies with huge potential for growth. Of course, it has its limitations so always use it responsibly!
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