Truth be told, most people pay a lot of attention to the price of bitcoin, Ethereum, and other mainstream cryptocurrencies. However, surprisingly, focusing on individual coin prices is not the best way to assess the value of a digital currency in the crypto market. Instead, you should focus on the market capitalization.
Understanding ‘market cap’ and ‘price’
In simple terms, market capitalization is the amount of fiat money such as USD or GBP currently invested into a particular cryptocurrency. It is similar to the combined value of all of the shares of an openly traded company. You can arrive at this value by multiplying the number of shares by the price per share. For instance, if a company has 1 million shares and each share trades at $10, the market cap of that company is ten million dollars. A market cap is also applicable in particular stock exchanges, where it determines the total value of listed stocks.
Price, on the other hand, the amount you pay to purchase a single coin or token of a particular cryptocurrency. In the crypto market, both market cap and price are confusing terms to many people, nearly all of the time. The price of a particular cryptocurrency depends largely on the forces of supply and demand in the market.
Market cap and price in the crypto market
In the crypto market, you cannot compare the prices of two cryptocurrencies because one might have a higher supply than the other, which eventually reduces or increases the price of each coin. For bitcoin, which is the leading cryptocurrency, the market cap is the number of the available coins currently in the market multiplied by the current price per coin. Obviously, Bitcoin is different from stocks and the market cap, usually given in US dollars, does not take into account the value of more than four million coins still not mined.
According to CoinMarketCap, the market cap is calculated using the circulating supply figures in the crypto market and not the total supply amount. The latter includes destroyed or lost coins so it cannot reflect an accurate figure for the market cap.
Why should you use market cap to compare?
Just like in a company where the price of one share cannot determine the overall value, the market cap matters in the crypto market as well. The price of one coin or token cannot determine the size or profitability of a cryptocurrency. For that reason, it’s important to focus on the market cap.
In stock markets, it is possible for a company to have a low price per share but still have a high market cap, if it has a high supply. In the same way, a company could have a high price per share, but a low market if it has limited shares in the market. Any value above $10 billion is considered a high market cap, implying that the company is reliable and profitable.
If you observe CoinMarketCap listings, you’ll realize that they list currencies from the largest to the smallest based on the market cap and not price. For bitcoin, initially, the price of one coin was the sole factor for measuring its increasing value. However, as more altcoins joined the crypto market, it is essential to focus on the market cap to assess and compare the value of a cryptocurrency.
Each digital currency has a pre-set amount of supply. For example, Bitcoin has 21 million, which it cannot exceed. Similarly, every altcoin has a different number of available coins. With such variation, it’s impossible to judge the value of a cryptocurrency based on the price of a coin or token alone.
The market cap provides the real measure of the value and size of a currency. If we expect Ethereum to be of the same size as bitcoin, then the two cryptocurrencies must have the same market cap one day. When that happens, the price of one Ethereum coin will be much lower than that of bitcoin.
Take, for instance, Ripple (XRP), which, as of this writing, costs slightly more than a dollar. This may seem insignificant compared to the price of one bitcoin, yet Ripple has the third largest market cap of any digital currency in the crypto market. With more than 39 billion XRP in circulation, it is way above Bitcoin with only less than 17 million coins in circulation.
With that in mind, it is safe to say that the price per coin provides no measure of the size of a cryptocurrency or its potential to grow. In the crypto market, it’s always important to focus on the market cap and not the price per coin.
Current crypto market cap is around $500 billion
With the price of bitcoin hovering between $10, 000 and $11,000, the market cap of all digital currencies currently rotates around the $500 billion mark—and will possibly move a step further. As of this writing, the total value of the crypto market is around $460 billion according to CoinMarketCap figures.
This is an increase of more than 40 percent February 6, when the market cap dipped to $276 billion.
Bitcoin, the world’s leading cryptocurrency, is set to increase in value soon, which is why the total market cap could go higher than the present value. The cryptocurrency has been flipping between $10,000 and $11,000 in the last 48 hours and is today trading at $10,725 per coin, which is a dip of -4.54%. However, according to latest reports, BTC looks well on track with higher values expected in near future.
Winners and losers in the crypto market
However, considering the worst losers in the crypto market in the last two days, Bitcoin ranks second among the top ten digital currencies by market capitalization.
As of this writing, Bitcoin Cash (BCH) is the biggest loser in the last 24 hours with a drop of -6.35%. Litecoin also experienced a drop of 8.96%, which could be due to profit taking, since the cryptocurrency moved by more than 100 percent from a low of $106.94 on February 6.
Recently, Litecoin attracted investors with the hope that they could make easy money through Litecoin cash hard fork. However, the original Litecoin (LTC) has remained resilient, currently trading at $213.64 on CMC.
For now, Bitcoin cash (BCH) has dropped 6.35%, currently trading at $1307.32 per coin. In addition, dash presents an interesting scene. The cryptocurrency has moved up the list, replacing IOTA as the tenth largest cryptocurrency by market cap. It has also come out as the most resilient in the last 24 hours dropping only slightly in the last 48 hours. Dash currently trades at $666.09 on CMC.
Hopefully, this information could help us understand how the crypto market operates. Cryptocurrency is such as volatile market and before you test the waters, you should gather as much information as possible.
Do you think the crypto market is headed for a higher market cap? Join the conversation over at Telegram (https://t.me/coinstaker)
Images via Investopedia, Steemit, and bitcoinnews
Tony is a writer for the crypto space. He presents cryptocurrency and blockchain topics to the public in a way that he only can. While carefully researched, this article should not be taken as an express investment guide. Do your own research and consult a financial advisor before you invest in cryptocurrency.
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