Crypto Basics Crypto Metrics

Market Capitalization 

If you invest in the cryptocurrency or the stock market, knowing what market capitalization is and how it helps you realize your investment potential is essential. Market capitalization can help you make better decisions about your investments and inform you about the risk you are taking. 

In this post, we’ll define market capitalization, show you how to incorporate it into your investing plan, and discuss how it can help you diversify your portfolio.

What is Market Capitalization

Market cap is the total value of a company. To calculate a company’s market cap, you must multiply the share price by the number of the company’s outstanding shares. After the company goes public and is traded, the cost of the shares is determined by the supply and demand of the company’s shares. For example, if there is a high demand, the price increases, and if there is a lot of supply for the shares, the price decreases.

Market Cap Stocks = Actual Share Price * Total Number of Shares Outstanding

In the blockchain industry, market capitalization is the estimated overall size of a cryptocurrency in the market. It is calculated by multiplying the current market price of the coin with the total number of coins circulating in the market. 

Market Cap  Crypto = Current Price * Circulating Supply

Diluted Market Capitalization

This occurs when a security’s value changes over time due to the outstanding shares on the market. Diluted market cap is ubiquitous as new tokens or coins are routinely minted. The diluted market cap calculates the potential market capitalization with all authorized shares or tokens issued.

Diluted Market Cap = Total Number of Shares Authorized * Current Share Price  

Free-Float Market Capitalization

The free-float technique counts the number of shares in the market for the public to buy and sell Instead of considering all the outstanding shares. The free-float approach does not include locked-in shares, such as those held by company executives and governments, unlike the full-market capitalization method, which uses all shares.

Some people believe that the free-float method accurately reflects market changes and equities actively traded in the market. The market capitalization obtained when employing a free-float method is lower than that obtained when utilizing a full market capitalization method. You can calculate the free float market cap using the following formula: 

Free Float Market Cap = (Number of Shares Issued – Locked-In Shares) * stock price

Market Cap Categories 

You can make better-informed investment choices by comparing the market capitalization of several stocks or cryptocurrencies. Market cap can be classified into these categories:

  • Large-cap: Stocks or cryptocurrencies with a market capitalization of 10 billion or more. Generally, securities in this category are well-established and significant players in the market. This type of security usually doesn’t offer considerable returns in the short term, but investors benefit from the consistent increase in share value and dividend payments in the long run. 
  • Mid-cap: Stocks or cryptocurrencies with a market cap between 2 billion and 10 billion. Mid-cap companies or cryptos are established and are in the process of growing. Mid-cap securities are attractive due to their growth potential, but they present a higher risk than large-cap securities. 
  • Small-cap: stocks or crypto with a market cap between 300 million and 2 billion. Generally, they are young companies or cryptocurrencies or businesses that serve a new industry or specific niche. These small-cap companies or cryptos are riskier because their price has higher volatility, but their rapid growth could benefit early investors.
  • Micro cap: stocks or crypto with a market cap between 50 million and 250 million. They are small companies or cryptos compared to the other categories and have the highest volatility. Limited information about these securities makes them challenging to analyze, and they have lower liquidity because of the lack of large institutional investors. 

What Can Affect Market Capitalization?

  • Demand and supply of the stock or cryptocurrency 
  • Competitor performance
  • Economic and geopolitical environment
  • Company or cryptocurrency news
  • Cryptocurrency or companies fundamentals 

Software to Track Market Cap

Market cap tracker for stocks:  

Market cap tracker for cryptocurrency

Does the market cap affect the stock price? 

No, market capitalization and stock price or currency price express the same information, any change that happens on either one is reflected in the other. You can see the stock price as the market cap divided by the number of outstanding shares. 

Why Market Cap is Important

Market cap is an important analytic tool that lets you determine the size of a  company. Market capitalization serves as the starting point for investor analysis. For instance, if company A has two times the revenue of company B but a smaller market cap, you can infer that company A is outperforming company B.

Therefore, market capitalization essentially helps investors estimate how a company or cryptocurrency will perform in the future and what price the market is willing to pay for that asset. Also, by determining the company’s market cap, you can assess the potential risk and return you can get for investing in the company or cryptocurrency. 

Final Take

Market capitalization is a method for evaluating an investment’s potential. It offers a quick and straightforward way to determine a company’s or cryptocurrency’s market value and size. Always keep in mind that the market cap is an investing metric, and you should ideally support your investing decisions with fundamental analysis. 

Most investors diversify their portfolios with stocks or cryptocurrencies with different categories of market caps. You can adjust it to your goals depending on your risk levels. You should have a more significant percentage of large-cap stocks in your portfolio if you want it to be less risky. If your main objective is to grow your portfolio as much as possible over a long period, you should probably purchase more small-cap and mid-cap securities.

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