Newcomers often think that price alone reflects the value of cryptocurrency. But to get a real sense of investment potential, you need to look at price alongside market capitalisation.
What is crypto market cap?
Market capitalisation is a metric that indicates the market value of a cryptocurrency. It can be calculated with this handy equation:
Current price x circulating supply = market cap
Market capitalisation is used to accurately identify the value of a cryptocurrency compared with other assets.
The concept is borrowed from the stock market, where market capitalisation represents the current share price multiplied by the total number of existing shares. If each share is one slice of the company pie, then the share price multiplied by the total number of shares gives the total company value.
Why is this important to consider?
Without taking market capitalisation into account, the price of a share alone doesn’t tell you much. Likewise, the price of a cryptocurrency alone doesn’t tell you much about the total market value.
This is why analysts use market capitalisation to make informed investment decisions.
How to calculate crypto market cap
Imagine that XRP costs $0.50 per coin and has a total circulating supply of 40 billion. This gives XRP a market cap of $20 billion.
XRP total market cap: $0.5 (price per coin) x 40,000,000,000 (total number of coins) = $20,000,000,000 (market cap)
Now imagine that litecoin costs $50 per coin and has a total circulating supply of 84 million. This gives litecoin a total market cap of $4,200,000,000.
Litecoin total market cap = $50 (price per coin) x 50,000,0000,0000 (total number of coins)
For litecoin to overtake XRP in market cap, either the price of an individual litecoin would have to increase, or the total supply would have to increase without the price reducing
Circulating Supply, Total Supply, and Max Supply
There are three metrics used for calculating cryptocurrency market cap: circulating supply, total supply, and max supply.
Circulating supply is the most commonly used metric. This represents the number of coins currently circulating in the market available to the general public.
Other methods of calculating market cap use total supply, which represents the total number of coins in existence. This might include coins that are locked, reserved, or not sold on the public market.
Max supply is the total number of coins that could ever be created in the lifetime of the cryptocurrency.
Circulating supply is thought to give the most accurate measure of market cap because it doesn’t include coins that are not in public circulation.
Crypto market cap ≠ total fiat investment
New cryptocurrency investors often mistakenly think that the market cap reflects the total amount of fiat currency invested in a coin. This is false for a number of reasons.
- When a cryptocurrency is first created, not all of the coins will necessarily be purchased. If the total number of coins is 20,000,000 and only one person buys a coin for $1, the total market cap would still be $20,000,000.
- When the price of a cryptocurrency rises, the value of everyone’s cryptocurrency moves up, increasing the market cap beyond the total sum of money invested.
A 2017 estimate from JP Morgan found the cumulative amount invested in bitcoin up to 2009 was $6 billion, which was significantly lower than the market cap at the time of $300 billion. This means that for every dollar invested in bitcoin, the market cap increased by fifty dollars.
Crypto market cap vs other assets
Cryptocurrency is so different from other markets that comparing market capitalisations across asset classes is like comparing apples to oranges. Nevertheless, the comparison can still be useful to monitor growth.
This article should not be used as or considered investment advice. If you have questions regarding cryptocurrencies, tokens, or any financial investments, please consult your financial advisor.