What Is A Capitalisation?
Almost any processes occurring in the market of cryptocurrencies have parallels with the usual market. Such a strategy is understandable because these processes are similar, even though the crypto-market develops not so long ago and should orient to something. Let's take for example the capitalization of cryptocurrency? Based on this indicator you can analyze if the cryptocurrency is successful or not.
But even given the importance of this indicator, very few people understand what it actually is. It is logical that you must at least superficially understand the laws that control this market. This will make you feel financially literate and know which coins to buy, and which money should be left without attention.
So, let's get through the term.
Capitalization is the market value of assets (most often due to a company's stock) that are in circulation. To calculate the capitalization, you need to multiply the number of all available shares by the cost of one.
We will explain this concept in a simple example. There is a company that issues shares in the number of 100 pieces, and one such share of the company has a value of $ 100,000. To find out how much the company cost, the number of these shares must be multiplied by the cost per one piece. Thus, the price of our company, and hence the capitalization, is $ 10 million. This is how we have established by experience how capitalization works and why it depends directly.
Cryptocurrency Capitalization
If we talk about the cryptocurrencies, then each of them has its own capitalization (for example, the capitalization of bitcoin). However, do not compare capitalization with the exchange rate - these are different concepts, although interconnected - the higher the exchange rate becomes, the higher the market capitalization also rises.
Cryptocurrencies are not as simple as company shares, we mentioned before. If the number of shares is accountable and accounted for, the situation with the cryptocurrencies is slightly different, and it follows from the very feature of virtual money. First and foremost, it is important to note that, in general, the issue of capitalization is quite controversial. Many financiers and researchers of this area refer that it is just impossible to establish the exact amount of the market value of any of the cryptocurrency.
It is justified by the fact that many coins have been lost and it is impossible to determine how many and where they are. For example, the creator (or creators) of Bitcoin - Satoshi Nakamoto - disappeared, taking with him 1 million bitcoins. There are also numerous cases when the virtual money disappeared along with lost passwords, burned hard disks where they were stored, etc.
Capitalization is an essential parameter in assessing the attractiveness of the cryptocurrency for investment. The higher the coin's "maximum", the lower its volatility and the more difficult it is to affect its value. For example, to move the Bitcoin rate by several percents, it is necessary to conduct billions of purchases on exchanges. And the cost of the new altcoin affects the activity of average traders.
Formally, the capitalization of bitcoin can be calculated by anyone. It is enough to know the total number of currency units issued and its average market rate. These two parameters are multiplied among themselves.
Cap = Rate * Cryptocurrency turnover
Experts note that the real capitalization of Bitcoin differs from the fact that they "paint" services like CoinMarketCap. These sites take into account the amount of generated cryptocurrency and not its actual turnover. The total "loss" of bitcoin emissions is from three to five million coins.
What affects the capitalization?
The two main factors that affect the capitalization of the bitcoin and most other cryptocurrencies are the number of coins in circulation (emission) and their rate.
In the case of BTC, the emission is constantly growing because of mining - the production of cryptocurrency. So that the complexity of production is also growing. And this in many ways influences the appreciation of the rate.
There are coins with primary emissions. For such a cryptocurrency, capitalization is directly dependent on the exchange rate and market activity. After all, the total volume of coins does not change. An example of such a cryptocurrency is NXT.
Since capitalization is tied to the exchange rate, the overall demand on the market exerts its influence on it. The higher it is, the higher the rate and the higher the capitalization of the asset. In turn, the demand is influenced by the following factors:
- The behavior of large traders on stock exchanges;
- New developments in the field of cryptocurrencies;
- Sayings of famous personalities, forecasts of experts and financiers;
- Laws, determination of Bitcoin status and crypts;
- Other important news related to the world of cryptocurrency.
The growth of Bitcoin in 2017 was due to an increase in demand for cryptocurrencies in general. This has been influenced by numerous ICO, legalization of bitcoin in Japan, BTC forks, decision to switch to SegWit2x protocol, lots of events and exhibitions. All this is avalanche-like, so the rate and capitalization of the bitcoin are growing.
With a drop in demand, capitalization is falling. If tomorrow the US or China issues a bill banning Bitcoin, the market will immediately react with a "drain" of cryptocurrencies. The rate will decrease significantly, and with it - the capitalization. After reaching a mark of $1000 at the end of 2013, the cost of Bitcoin in 1.5 years decreased by five times. This happened against the background of the sale of BTC by large investors to obtain short-term profits.
What does capitalization affect on?
The value of the total capitalization reduces the volatility of the exchange rate. You need to sell BTC for hundreds of millions of dollars to influence its value. With small coins, this is much easier, so often unknown cryptocurrencies can rise in price by 80% in a few hours, as happened on March 2018, with Storm, when he appeared on the major Binance exchange.
In 2017, the cost of BTC went up 15 times, and Ripple went up 17 times only in December. The rate of many coins, such as Stellar and Cardano, grew many times at the end of last year, while their total capitalization was significantly lower than that of bitcoin.
Also, capitalization largely influences the recognition of the cryptocurrency. Coins, which are in the top 10 by this indicator, are most often mentioned in the media.
Conclusion
Capitalization is one of the main market characteristics of the cryptocurrency. It shows the total value of all coins in use. This is an indicator of the market power of a coin.
This parameter is important when choosing a crypto asset for investment. A currency with a high level of capitalization is resistant to small market fluctuations. The rapid growth of the rate for such crypto is uncharacteristic. But assets with a low capitalization show serious fluctuations in short intervals.
Be sure to consider these points if you plan to invest in the crypt. Also, pay attention to the daily fluctuations in capitalization - these are market signals.