There are many terms you should know in the world of cryptocurrency. One of the most important you should familiarize yourself with is coin market capitalization, or coin market cap. This is a useful metric to have when attempting to know the true value of a cryptocurrency. If you visit a site like Coin Market Cap or Coin Gecko, you can see the market valuation of a digital asset and where it ranks in comparison to other assets.
So, what does market cap mean in crypto? And how can you use it to make informed investment choices? We'll answer these questions and a few more below.
What is coin market capitalization?
The market capitalization of a coin is calculated using the following formula:
Current market price of the coin x Total supply in circulation = Market cap
That's it. That's all there is to it. It's the product of a coin's current price and the total number of coins in circulation. For example, if Ethereum is worth $2,000 and has a circulating supply of 100,000, then the market cap of ETH is $200 million. Pretty straightforward, right?
The market capitalization of a coin can be an important indicator of how well a cryptocurrency is performing, but don't be fooled. The market cap is not the same as a project's inflow. It does not accurately depict how much money is in the market for a given coin. This type of thinking often causes problems for investors unfamiliar with the term, especially since it involves the price of the coin. The reality is that even a small variation in price can significantly impact market capitalization.
Understanding Large Cap, Midcap, and Small Cap
Large market cap, mid market cap, and small market cap are terms used in both the stock market industry and the world of digital assets. If you're looking at these terms as they relate to the stock market, a corporation like Google or Apple is considered large cap, since they have many shares and trade at a high price. However, a penny stock would be considered a small-cap company since its price is lower and it doesn’t have as many shareholders. Along the same lines, it would be like comparing Bitcoin, which has the largest market cap in all of crypto, to an altcoin project that just launched, which in all likelihood is going to be a small-cap digital asset.
But what makes a coin large cap, midcap, or small cap? Let's take a closer look.
Large Cap
To be considered a large-cap coin, the cryptocurrency market cap has to be more than $10 billion. At the time of writing in June 2021, the top nine cryptocurrencies in the market currently rank as large cap. These include Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Ripple (XRP), USD Coin (USDC), and a few others. If things keep progressing the way they are, we'll soon see more altcoins — like Bitcoin Cash (BCH) and Binance Coin (BNB) — joining the list. These are all projects that have a proven track record and strong security within the crypto space.
Digital assets that fall in the large-cap category typically offer high liquidity. This means you're likely to find these digital assets on almost any crypto exchange with high trading volume. Additionally, you can often trade these cryptocurrencies for fiat currencies, since they offer so much market value. While large-cap coins are less volatile than their mid- and small-cap counterparts, they're still more volatile than traditional stocks.
Midcap
Midcap crypto assets are cryptocurrencies that have a market cap between $1 billion and $10 billion. This list has grown extensively over the past few years. As of June 2021, 40 of the top 66 digital assets are considered midcap based on cryptocurrency market capitalization, and it won't be surprising if a few more join that list this year. Popular cryptocurrencies that fall into the midcap tier include DASH, Cosmos (ATOM), Algorand (ALGO), and Litecoin (LTC).
Many investors view midcap coins as better options because of their growth potential. Even though they are not as established as large-cap cryptocurrencies, midcap projects typically have yet to realize their full promise. Some investors view midcap opportunities as better investment decisions since the possibility exists that they could turn into large-cap projects.
Small Cap
As you may have guessed, small-cap cryptocurrencies are digital assets that have a total market cap of less than $1 billion. These cryptocurrencies may not have the resources or the longevity of other projects in the crypto market. Due to the amount of time they've been in the market or their security, small-cap companies are considered higher risk than large-cap or midcap projects. There are a few small-cap projects that you may have heard of, though. Basic Attention Token (BAT), Paxos Standard (PAX), and Nano (NANO) all fall under the small-cap umbrella.
There are several reasons investors avoid small-cap coins, including high volatility, low liquidity, and high risk. Small market cap coins are more vulnerable to significant price fluctuations. Just one buy or sell order can make the price of a small-cap coin skyrocket or bottom out. Additionally, since these digital assets are less liquid, it's harder to find exchanges that allow you to buy, sell, or trade them.
Why is market cap important to crypto?
Unlike traditional financial assets like bonds or stocks, cryptocurrencies are mostly unregulated. Because of this, using the total market cap of a coin can be a good indicator of a project's presence in the industry. That doesn't mean it's the only tool you should use to determine the potential of an asset.
For example, there are more than 46 billion XRP tokens floating around in circulation. By comparison, BTC has a little more than 19 million. However, on June 22, 2021, one Bitcoin was worth just under $32,000, while one Ripple was $0.62. Unfortunately, many novice investors choose to use market cap as a way to evaluate a cryptocurrency, which has resulted in significant losses for some.
Like many tools, a cryptocurrency's market capitalization is best used in conjunction with other instruments. Using it as the only indicator for investing in a digital asset isn't wise, but it can give you a solid idea of a coin's relevancy.
Market capitalization in decentralized finance
Because the DeFi sector is still in its nascent stages, most of the cryptocurrencies in this market will rank in the midcap or small-cap tier of market capitalization. However, as this sector of the crypto industry continues to grow, so too does the total market capitalization of many of these projects. It won't be long until one of the following joins the ranks of the large-cap projects.
ChainLink (LINK)
You'll be hard-pressed to find another decentralized oracle network used as much as ChainLink. This project inputs real-world data into smart contracts that reside on its blockchain. As a result, there are unprecedented amounts of information moving between decentralized apps.
Due to the rising popularity in DeFi, ChainLink has shown significant growth — so much so that it can now fund other decentralized projects that want to join the ChainLink ecosystem. Currently, ChainLink sits at number two on the market cap list for DeFi projects and number 14 for all cryptocurrencies.
Aave (AAVE)
Another popular DeFi project that's getting a lot of traction is the crypto lending platform Aave. This non-custodial liquidity protocol gives users a way to both borrow on digital assets and earn interest. Additionally, users can stake the platform's native coin — AAVE — to contribute to both the performance and the stability of the ecosystem.
The coin also offers plenty of benefits. Not only will you get discounted fees when using the platform, but AAVE also offers plenty of use cases that appeal to the crypto crowd, including crypto arbitrage, collateral swap, and self-liquidation. Aave is also one of the largest DeFi cryptocurrencies on the market. It ranks number five on the list of decentralized cryptocurrencies and number 29 overall.
PancakeSwap (CAKE)
If you're looking for an alternative to Ethereum-based decentralized projects, you might want to check out PancakeSwap. This decentralized exchange resides on the Binance Smart Chain, letting users swap BEP-20 tokens at their convenience. PancakeSwap offers users its CAKE token, which can be staked in one of the many liquidity pools the platform offers.
The low fees and bevy of options available on PancakeSwap has steadily driven the popularity of the coin upward. It sits in the number seven slot on the list of DeFi coins and in the number 35 slot on the overall rankings.
A device for your crypto tool belt
Market capitalization is an important piece in evaluating any cryptocurrency. It shows how relevant a coin is and how much the industry values it. However, it's not the only tool at your disposal. There are many other methods and options available. This includes exciting capabilities within the world of decentralized finance.
For example, many platforms now offer ways to stake cryptocurrencies or use them to yield farm. Unagii is one such platform. With Unagii, you can put your crypto to work for you. Plus, with its vault technology, your robo-adviser will automatically harvest the best yields.
No matter how you choose to invest or evaluate your digital assets, don't neglect its market cap. Whether you're considering large-cap, midcap, or small-cap coins, the market cap will provide insights into making an informed, educated investment decision.
