When it comes to sizing up the fortunes of a publicly traded company, there are few more widely used metrics than market capitalization or market cap. This measure is calculated by multiplying the number of a company’s shares outstanding by its share price.
A company’s market value is an excellent indicator of how investors view its growth prospects. If a business’s market cap greatly exceeds its revenue and profits, that usually means shareholders are bullish on its future. Tesla, for instance, sports a market cap of about $1 trillion compared to its sales of $36 billion in the first nine months of 2021. Clearly, investors are betting the company is poised to rake in big profits from a global shift to electric vehicles.
What is market cap in crypto and how do you calculate it?
The market cap for cryptocurrencies is calculated in much the same way: by multiplying the number of tokens in circulating supply by the market price. The big difference, though, is that investors cannot analyze a cryptocurrency’s financial statements for clues on its future growth rate. That’s because cryptocurrencies aren’t companies and do not produce that type of fiscal data—they’re alternative assets that dwell outside the conventional financial system.
Why is market cap an important metric for cryptocurrencies?
Driven primarily by speculation, cryptocurrency valuations are hard to read. Even the movements of widely held tokens such as Bitcoin largely remain a mystery. But by factoring in circulating supply, crypto market cap is a more thorough measure of a token’s value than its price alone. That’s why investors use the metric to assess a token’s potential, especially in lieu of the many financial variables available in the stock market.
Market cap analysis can highlight broad trends and provide insights into specific tokens. For example, the market value of Ethereum’s ETH token multiplied about 50-fold in 2021, to $500 billion, compared to three times for cryptocurrencies as a whole. That suggests investors believe ETH is poised to outpace the market. But why?
That’s where it gets tricky. In this case, Ethereum did recently undergo a major upgrade to improve its functionality. The Ethereum blockchain also supports an app that’s captured the imagination of investors: non-fungible tokens, or NFTs, which enable artists and other creators to fashion unique digital images with certificates of ownership. Understanding these developments can help investors put Ethereum’s market cap increase in context. In a market as hard to read as crypto, that’s valuable.
What are the different types of market cap?
Just like stocks, cryptocurrencies are divided into three market cap sizes: small, mid, and large cap. The risks and growth potential of each group vary as one moves from large to small.
There are about 18 large cap cryptocurrencies exceeding $10 billion in value. These tokens are so big they tend to pull the rest of the market with them when they move up or down. Investors consider these assets less risky than smaller tokens because they are widely held and less susceptible to sudden drops if a major holder dumps a position. Crypto enthusiasts also use large-cap tokens to buy other coins and applications such as NFTs. This feature lessens their risk as purely speculative plays.
Mid caps range from $1 billion to $10 billion in market value and are less widely held than their larger counterparts. Investors consider them riskier, yet they tend to offer more upside potential in the short term because they’re still relatively new tokens catching on with crypto enthusiasts. The market value of Uniswap, a platform for exchanging tokens that recently became popular, multiplied sevenfold in 2021 to $9.2 billion.
Small caps, which have market values of less than $1 billion, are the riskiest group. They tend to be little-known, new, and thinly traded tokens that may never appreciate, or worse, crater if the issuer is hacked, not an uncommon occurrence at this end of the market. That being said, small caps can also explode in value if they get hot. Last January, Fantom, a decentralized finance blockchain, had a $72,000 market cap. This summer it caught on with speculators, and as of mid-December 2021 it was worth $3.3 billion.
What are the risks of relying on market cap in crypto?
The biggest concern with market capitalizations in crypto is on the supply side. Many issuers of tokens can increase and decrease their supplies with no warning, and no outside oversight. That means an investor may suddenly discover their token has been seriously diluted after an issuer flooded the market with fresh coins.
Moreover, many tokens are often locked up in dormant digital wallets or lost. That means a significant number of coins may never truly enter the circulating supply. As a result, the token’s market cap figure probably will be an inaccurate reflection of its true value.
These dynamics differ dramatically from the stock market. When companies issue new shares, they have to file public disclosures ahead of time with regulators. The same holds when they decrease supply by buying back stock.
What are the top cryptocurrencies by market cap?
- Bitcoin sported a market cap of about $890 billion as of mid-December 2021, which comprises 42% of the total market. Since it was introduced 13 years ago, Bitcoin has demonstrated resilience and become increasingly accepted as a legitimate asset class in a diversified portfolio.
- Ethereum is the longtime No. 2 digital asset, with a market value of almost $450 billion. Ethereum’s ETH token supports its blockchain and the development and distribution of specialized applications called “smart contracts” as well as NFTs.
- Binance Coin, the No. 3 player with a market cap of $88 billion, is the “utility token” issued by the giant Binance exchange. Users spend the coin on services such as payments, transaction fees, and online services.
- Tether, No. 4 at $76 billion, is what’s known as a stablecoin. It’s pegged to the US dollar and lets users sidestep the volatility of the crypto market without having to convert their assets back into traditional currencies.
- Solana is the newest addition to the top five, with a $48 billion market valuation. It has developed a blockchain to challenge Ethereum’s and is rapidly winning over investors and users with its speed and scalability.
The bottom line
The market capitalization of cryptocurrencies can provide a useful perspective on how investors size up the growth potential of tokens and provide insight into the trends at work in a highly speculative asset class. Yet market caps in crypto do not reflect the values of tokens with the same degree of accuracy as their counterparts in the stock market.
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