Market capitalization is a term that refers to the total value of a company’s shares relative to the market and is the basis for a lot of key decisions in the stock and investment world. But how does this apply to cryptocurrency, and should you pay attention to it if you want to turn a profit?
What is Crypto Capitalisation?
Every cryptocurrency, no matter how popular or obscure, has a fiat value. This is the total value of the coin relative to ‘real’ money and is altered by a range of factors that you can’t control. On the surface, this seems reasonable, but paying attention to this value can make a huge difference.
Essentially, market capitalization refers to the total value of the cryptocurrency in conventional money, usually dollars. It does not refer to the amount of money invested into that currency, though.
Market cap is the total number of coins multiplied by the price of said coins.
What Changes Capitalisation?
If a cryptocurrency has had $1 billion dollars invested in it, there is always a chance that the demand will rise. Aggressive bidding can lead to the coin’s price being raised, which might push the market cap higher and raise the total value of those coins to $1.5 billion.
However, that extra £0.5 billion is not money that was spent to get the coins – because the value has been pushed up, the value of the final purchase may have been what pushed the market capitalization that high.
Basically, the capitalization changes are based on the current going rate of one coin applied to all coins. Even if an initial crypto release only sells 50 out of 100 coins for $100 each, but all 100 are in the market anyway, the total value is still $10,000.
Why Does It Matter?
Investments are all about values rising and falling – and more specifically, selling at the right time. You want to sell when demand is higher than your purchase value, but not wait so long that the value peaks and drops down again.
Market capitalization offers a rough estimate of how stable and reliable the value of a coin is. A larger market cap means that the coin is not really going to change dramatically unless something major happens. It can also hint that it is a popular currency.
Market cap can also be a good way to tell how safe investment might be. Market caps between around $1-$10 billion can be high risk, but the growths can be much more noticeable. A smaller market cap is safer, but the growth could be as much as a few dollars per month (or less).
Should I Purchase Based on Market Cap?
Never buy exclusively with a market cap in mind since it is not the only thing to consider. However, it can be a valuable factor when you are looking at a currency and is not something you should just ignore. Even if this sounds complex at first, take some time to understand market capitalization in cryptocurrency. The more you know, the easier it becomes to know if you are making a good investment.