Cryptocurrency Market Cap Explained

On December 18 2024, the total cryptocurrency market capitalisation surpassed a whopping US$3.7 trillion. That remains the all time high for the asset class which has only existed for approximately 15 years.

Yes, that’s a huge number. But without the context, what does it really mean? Is it an indicator of any historical trend, growth potential, or actual dollar amount?

Let’s dive into the most commonly touted crypto statistic: market cap. We’ll discuss what it really means, how it’s calculated, and how this metric could help you make decisions on future crypto investments.

Definition:

In the crypto market, market capitalisation (market cap) is the total dollar value of all coins in circulation. Market cap can be used to measure the value of a specific cryptocurrency, as well as refer to the total capitalisation of all cryptocurrencies in existence.

What is Market Cap in Crypto?

Market cap is a metric used to help traders and investors understand the value or value potential of a particular cryptocurrency. It’s a concept with roots in traditional investing, where market cap is used to quantify the dollar value of shares in circulation for a company. 

The size of a market cap can help investors make inferences about the risk profile of a coin, its potential for long-term growth, and its market dominance.

How is Market Cap Calculated?

There are two common ways to express cryptocurrency market cap: circulating supply or fully diluted supply. Market cap can be calculated by using the number of coins currently in circulation (circulating supply). Or it can be calculated using the number of coins that will be in circulation once the limit is reached (full diluted supply). 

Given that this serves mainly as a tool for making investment decisions in the present, circulating supply is almost exclusively used when calculating market cap. However, if you’re set to be a long term holder it’s worth considering the impacts of a fully diluted supply on your stake.

Market cap based on circulating supply is calculated with the following formula:

Current Price x Circulating Supply = Market Cap

Difference Between Small, Mid, & Large-Cap Cryptocurrencies

When using market cap to discuss cryptocurrencies, they are generally divided into three categories: small, mid, and large-cap.

Small-cap cryptocurrencies

Small-cap cryptocurrencies tend to have market caps under $1 billion. Compared to other coins, they usually have less exchange support, lower volume, or both. For this reason, small market movements can create volatile swings for these small-cap cryptocurrencies.

Mid-cap cryptocurrencies

Mid-cap cryptocurrencies have capitalisations between $1 billion and $10 billion. Traders often look to mid-cap coins to predict growth potential. Yet since these cryptocurrencies haven’t established large-cap positioning, there is still a greater level of risk involved.

Large-cap cryptocurrencies

Large-cap cryptocurrencies with capitalisations of more than $10 billion. These are your ‘household name’ coins; Bitcoin, Ethereum, XRP, and more. These cryptocurrencies have a relatively higher trading volume compared to other crypto assets.

Bitcoin, Ethereum, Tether, BNB and Solana are examples of Large-cap cryptocurrencies. Image: Shutterstock

Why Are Large-Cap Cryptocurrencies Considered to Have Lower Risk Profile?

It goes without saying that cryptocurrency investments are more often than not more volatile than stocks or any other traditional investments. That said, investors see large-cap cryptos as stable investments within a volatile market. The large-cap coins which have shown growth over time (not overnight growth) usually have high liquidity, characteristics similar to the largest and long-standing publicly listed companies – stalwarts like General Motors, Ford and other multinational giants.

So if many investors decide to market and sell these larger assets at once, price and market cap drops will be smaller compared to a sell-off of small or mid-cap market assets.

Market Cap vs. Cash Inflow

Market cap and cash inflow are often confused because both are expressed in dollar amounts, but they represent very different concepts.

Market Cap is the total value of a cryptocurrency, calculated by multiplying the current price of one coin by the total number of coins in circulation. It’s a snapshot of the coin’s overall value, not the amount of money that has been invested or is currently in the market. Cash Inflow, on the other hand, refers to the actual money being invested into the market—new funds coming in to buy the cryptocurrency.

Market cap can change due to fluctuations in the coin’s price, even if no new money is entering or leaving the market. For example, if the price of a coin goes up, the market cap increases, but this doesn’t mean that more cash has been invested.

It’s important to recognise that market cap is not a direct measure of cash inflow; it simply reflects the current value based on price changes and the total supply of coins.

Other Metrics & Ways to Evaluate Cryptocurrencies

While market cap is important, you should never use this number alone to evaluate a potential investment. Below is a list of other things to consider while doing your research.

• What is the project solving? i.e. Is there utility?
• Do the values of this project align with my values?
• What is the overall project ranking?
• Read the project white paper, is there anything about the project that seems questionable? (e.g. lack of real-world case use, issues with legality)
• Price History
• Liquidity
• Volume

Market Cap vs Volume

The relationship between market cap and volume can be speculative. Although one can influence the other in different ways, these influences aren’t an exact science. 

If a coin’s 24-hour trading volume exceeds its market cap in a given period, it could mean investors are speculating about its potential growth. It could mean something, or it could be a temporary trend.

Conversely, Bitcoin has a low trading volume when compared to its market cap (still a high volume otherwise). But since there is less action happening, it doesn’t mean that Bitcoin is losing value. We can probably infer that short-term holders (STHs) are becoming long-term holders (LTHs), reducing the overall liquid supply of Bitcoin. In other words the market is maturing, with lesser speculation at play.