Market Capitalization
The very first thing I check when analyzing a potential blockchain investment is the market capitalization of a cryptocurrency (often shortened to “market cap”). There are some different reasons why the market capitalization of a cryptocurrency is important, but the most important reason is because of the potential for growth. Before we get into the different sizes of market caps and why they matter, let’s talk briefly about what the market cap actually is.
What Is Market Cap and How is it Calculated?
The definition of market capitalization from Investopedia is pretty straightforward, but we need to relate it to the cryptocurrency markets, not just equities:
“It is the market value of a company’s shares. This figure is found by taking the stock price and multiplying it by the total number of shares outstanding.”
For equities (stock market) trading, that means we multiply the total number of outstanding shares by the stock price and that tells us the “market value” of the company. For example, if you started a company and issued 1,000 shares and the stock was trading at $2, then your company’s market capitalization would be $2,000 since it would be $2 x 1,000 shares = market cap.
When we’re looking at cryptocurrencies, things are a little different. Since we’re no longer looking at traditional “securities,” there aren’t any shares of stock in the market. Instead, I’m looking at the total number of coins “outstanding” and multiplying that number by the current price of one coin or token. “Outstanding” is just another word to describe the amount of coins/tokens that are actually in circulation. For example, we know that there will only ever be a total of 21,000,000 bitcoins (BTC) created. Period. However, that doesn’t mean there are that many currently in circulation now.
After checking CoinMarketCap, I can see that are currently around 17,100,000 BTC in circulation. As time goes on and miners find more BTC, that number will go up, but for right now, we need to use the current supply. Any coins/tokens that are locked up or not released yet are notincluded in the market cap calculation. So, what is the market capitalization of bitcoin then?
At the time of writing, bitcoin (BTC) is currently trading at $6,738.31. Now all we need to do is take that number and multiply it by the total amount of BTC in circulation, which is currently 17,103,050 (out of the total 21,000,000).
$6,738.31 x 17,103,050 = $115,245,652,846
After crunching the numbers, we know that bitcoin (BTC) currently has a market cap of around $115.2 billion. It’s a pretty simple calculation, and I can almost always find out what the market cap is of a coin by checking CoinMarketCap and searching for the cryptocurrency’s name.
Why Does it Matter?
Like I said, the reason why I’m so interested in market cap is because it can help tell me how much room a cryptocurrency has for growth in the market; that’s why it’s the very first metric I check when doing any proper due diligence on a potential blockchain investment. The reason I took you through the math behind calculating the market cap of a cryptocurrency is to show you that price isn’t the only factor when evaluating growth potential.
It’s not uncommon for new investors to look for a “cheap” cryptocurrency that’s trading for a low price. After all, they may remember hearing about bitcoin back when it was trading for pennies and now think that this cryptocurrency trading at less than $1 could be “the next bitcoin” and earn them a nice 6,000% return on investment (ROI). However, a “cheap” price for one coin/token doesn’t mean that the cryptocurrency itself is actually “cheap” or a bargain.
If we head back to CoinMarketCap, we see that Ripple (XRP), Stellar (XLM), Cardano (ADA), and Tron (TRX) are all trading for under $1 each, but does that mean they’re “cheap”? Short answer: no.
Just by looking at Tron’s TRX token, I know that it’s trading for a low price (just shy of $0.05), but it’s still the 10th largest cryptocurrency by market capitalization with a cap of roughly $3.1 billion. That tells me that for Tron’s TRX token to explode to even the $1 mark, it would need to multiply its current market capitalization by more than 20 times and overtake Ethereum’s ether (ETH) as the second-largest cryptocurrency, behind none other than bitcoin (BTC).
While that certainly isn’t impossible, it also isn’t terribly likely. So, when it comes time for me to invest in a new project, I’m looking for a mixture of different cryptos by market cap. The lower the market capitalization of a cryptocurrency, the higher the potential for growth is generally. Ultimately, that doesn’t mean that a crypto will grow exponentially just because it has a smaller market cap, but it does mean that there is more room and potential for it to grow.
On the other side of things, I like to make sure that I also have some of my holdings in higher cap cryptocurrencies. Cryptocurrencies with higher market capitalizations tend to have less risk than lower cap cryptocurrencies. At the same time, I am talking about the crypto markets here, so obviously there is going to be some significant volatility, but not to the same extent as small cap cryptocurrencies. The chances of bitcoin (BTC) randomly going to $0.005 on a given day is quite low. Small cap cryptocurrencies are the exact opposite. There is a chance for them to shoot up in price both rapidly and significantly, but there’s also the chance that they can sharply decline in value.
Quick Summary
Cryptocurrencies with a Small Market Capitalization (i.e. ‘Small Cap’ or ‘Low Cap’)
I consider any cryptocurrencies with a total market capitalization under $100 million to be “small cap” or “low cap” cryptocurrencies. These are the ones with a high upside potential for explosive growth, but they also come with increased risk. Since these cryptocurrencies, and the projects behind them, are typically not as well established as the large coins, there is an increased chance that they could potentially lose a lot of the value they have. In this category, many consider even smaller cap coins (those with under $25 million total market capitalization) to be “micro cap” coins.
Cryptocurrencies with a Medium Market Capitalization (i.e. ‘Mid Cap’)
Next up, we have cryptocurrencies with a medium sized market cap, called “mid cap” cryptocurrencies. I define these as any cryptocurrency with a market cap between $100 million and $1 billion. These are the coins and tokens that don’t quite fit into either the small cap range or the large cap range. However, this category spans a large area of the market. When choosing mid cap cryptocurrencies to add to my portfolio, I keep in mind which side the mid cap leans towards (either small or large cap). I use these cryptocurrencies to help balance out risk and potential growth as part of my portfolio.
Cryptocurrencies with a High Market Capitalization (i.e. ‘Large Cap’ or ‘High Cap’)
This last group of cryptocurrencies are the big ones that tend to bring less risk with them. I consider any cryptocurrency with a total market capitalization over $1 billion to be a “high cap” cryptocurrency. I always use high cap cryptocurrencies to help balance out my portfolio as well. High cap coins are particularly good for mitigating risk in your crypto portfolio. While it’s certainly true that bitcoin can go through major price changes, it’s less likely to drop to $0 than small coins with no experience or recognition.
Building a Portfolio
Throughout this fundamental analysis series, I’ll be covering the important steps for building a portfolio by deciding what blockchain investments to make, and having a mix of different market cap coins is an important piece of that. For me, I always look to diversify my investments to find the allocation that works best for me.
For example, if I’m maintaining a limited portfolio of only 10 different coins total, then I want to spread out my investments across different market cap coins. In the case of a 10-coin portfolio, I may wish to dedicate 5 or 6 coins to mid cap coins since they allow me reasonable exposure to potential growth while maintaining limited risk. After that, I would choose 2 low cap coins to add to the portfolio. These have significantly higher risk, so I make sure that they’re not making up the majority of my portfolio but still allow me to have coins with high growth potential in the portfolio. If they should happen to fail completely, I won’t lose all my portfolio…that’s why I do the next 11 steps though, which I will get to in the coming articles. Lastly, I dedicate 2–3 positions in my crypto portfolio to high cap cryptocurrencies since they remain the lowest risk. The key to building any portfolio is defining your objectives early on (High growth? Low risk? Slow growth? Long term? Short term? etc.…) and finding a system that works best for you. Happy Trading!