Before entering the investment world, including crypto assets, one of the things that potential investors need to know is the market cap (market capitalization).
Market cap needs to be understood before investing to reduce the risk of loss.
In simple terms, the market cap is defined as the value of a large/public company according to the total value of its shares.
In the investment world, the market cap is usually used as a measure of a company and can be used as an indicator of the value of a company or assets traded on the market.
Therefore, by knowing a company’s market cap, investors will get information regarding how much money they have to spend to buy all the company’s shares.
So, to understand the concept of market cap in the crypto market, including its meaning, how to calculate it, and its benefits in investing in crypto, see the following review.
What is a Market Cap?
Market cap is the total value of outstanding shares of a company/asset traded on the market.
Companies with a large market cap are considered more stable and tend to have better growth opportunities, and vice versa.
Meanwhile, in the crypto market, market cap refers to the total value of all coins/tokens circulating from a crypto asset.
Crypto market cap indicates the size and popularity of a crypto asset in the market.
Other aspects can also affect the crypto market cap, including liquidity, number of transactions, and market demand.
The market cap is more popular in the crypto market because it has different characteristics from traditional financial markets.
As is known, the crypto market is still relatively new and very volatile, with very fast and drastic price movements.
Therefore, investors also tend to look for ways to measure the size and popularity of a crypto asset in the market.
How to Calculate Market Cap in the Crypto Market
The way to calculate the market cap on the crypto market is by multiplying the last price of the coin/token by the total number of coins/tokens circulating on the market.
If formulated, the formulation is as follows:
Market Cap = Last Price x Total Circulating Amount of Coins or Tokens
For example, a crypto coin has a last price of $500, and the total number of coins on the market is 100,000.
Thus, the market cap of the coin can be calculated as follows:
Market Cap = $500 x 10,000,000 = $5,000,000,000
Therefore, from the example above, it is known that the market cap of the crypto coin is $ 5,000,000,000.
Market Cap Comparison in Crypto and Stock Markets
You need to know The following examples of crypto and stock market caps.
1. Market cap crypto
If an ABC crypto coin has a last price of $100 and the total number of coins on the market is 35,000,000, then the market cap of that coin can be calculated as follows:
ABC Market Cap = $100 x 35,000,000 = $3,500,000,000
In the example above, the market cap of the ABC crypto coin is $3,500,000,000.
2. Market cap stock
If the stock of XYZ company had a final stock price of $50 and the total number of shares outstanding on the market was 100,000,000, then the market cap of that stock could be calculated as follows:
Market Cap XYZ = $50 x 100,000,000 = $5,000,000,000.
In the above case, the market cap of XYZ company stock is $5,000,000,000.
However, even though the method of calculating market cap on the crypto and stock markets both involves the market price and the number of shares/coins in circulation, there are several important differences between the two, namely:
- Calculation of Stock Price vs. Coin Price
In the stock market, the share price is determined by the action of supply and demand on the stock exchange.
Stock prices can change dramatically depending on many factors, including company performance, government policies, and macroeconomic factors.
Meanwhile, coin prices are determined by supply and demand in the crypto market. Still, they are not affected by macroeconomic/company performance factors as they are in the stock market.
The price of crypto coins is very volatile and can change dramatically in hours or minutes.
- Number of Shares vs. Number of Coins
In the stock market, the market cap is calculated by multiplying the market price of the stock by the number of shares outstanding on the market.
Usually, the number of shares is fixed/changes gradually over time, depending on the relevant company policies.
Meanwhile, in the crypto market, the market cap is calculated by multiplying the coin’s market price by the number of coins circulating on the market.
However, the number of coins circulating in the crypto market can change rapidly due to the addition/removal of coins by mining/burning tokens.
- How to Trade Stocks vs. Coins
In the stock market, stock trading is carried out through a centralized stock exchange and regulated by financial authorities.
Meanwhile, coin trading is carried out via a decentralized crypto trading platform in the crypto market.
Advantages of Using Market Cap in the Crypto Market
There are several advantages of using market caps in the crypto market, including:
1. Comparing the value and popularity of one coin or token to another
Market cap helps investors to compare different coins or tokens in the crypto market.
By comparing the market cap, investors can find out which one is more popular and considered more valuable by the market.
In the end, it can help investors to make better investment decisions.
2. Help to choose a potential coin or token
Selecting a potential coin or token in the crypto market can be challenging, especially for investors new to the crypto market.
However, the market cap can be a helpful factor in choosing a potential coin or token.
3. Help measure the performance of one’s crypto portfolio
One of the advantages of using a market cap in the crypto market is that it helps investors measure their crypto portfolio’s performance.
By knowing each coin or token’s market cap, investors can track how their portfolio is performing over time.
Limitations of Using Market Cap in the Crypto Market
However, there are several limitations to using market caps in the crypto market, including:
1. Coin or token price fluctuations that can affect market cap
Fluctuations in the price of coins or tokens can affect the market cap because the market cap is calculated by multiplying the number of coins or tokens in circulation by the current price.
Therefore, if the price of a coin or token goes up, the market cap will go up, and vice versa.
The price fluctuations of coins or tokens can be influenced by many factors, including news related to the crypto market, government regulations, technology adoption, etc.
In addition, speculative and manipulative trading can also affect certain coins or tokens’ prices and market caps.
In the short term, fluctuations in a coin or token price can be large and volatile, but in the long term, fundamental factors can influence price and market cap more consistently.
Therefore, investors need to pay attention to fundamental factors and understand that coin or token price fluctuations are normal in the crypto market and can affect market cap quickly.
2. Limited use of market cap as the main indicator in choosing coins or tokens
Even though the market cap can be a useful indicator for choosing a coin or token to add to a portfolio, investors need to pay attention to the limitations in using it as the main indicator, including:
- Market cap is only one of many factors to consider.
- Market cap can be affected by speculative and manipulative trading.
- The market cap does not take into account the number of locked coins or tokens.
- Market cap does not take into account price fluctuations in the short term.
In conclusion, the market cap is an important indicator in the crypto market because it can provide an overview of the size and value of a particular coin or token.
Not only that, but the market cap can also provide an indication of the stability and potential Return On Investment (ROI) of the coin or token.
However, remember that market caps must be considered carefully and accompanied by a more comprehensive analysis to make wise investment decisions.
In this case, investors must also consider other fundamental factors before making investment decisions, including technology, development team, adoption, and others.
Let’s Start Crypto Investment
How do you understand market cap, starting from understanding how to calculate the benefits?
So, if you already understand, now is the time to start buying crypto assets on the INDODAX market.
Those of you who don’t have the application yet can first download the INDODAX application on an Android or iOS cellphone.
In the INDODAX application, you will find interesting features to help you invest in crypto assets.
If you have successfully registered until you have made a successful deposit, then you can start investing in crypto easily and safely.
However, you need to know that before starting a crypto investment, it is important to understand that this investment has a high level of risk and is very volatile.
You can learn more about the ins and outs of crypto assets only at INDODAX Academy.
Come on, invest in crypto right now at INDODAX!