Market Capitalization or Market Cap for short is a useful way of understanding the total size of a cryptocurrency and its value in relation to its size.
To find the Market Cap of a crypto asset the following formula is implemented: Multiply the price of a single coin/token by the total number of said coins that are currently in circulation.
This formula for finding the Market Cap is a useful indicator of the potential attractiveness of a crypto asset. When using Market Cap to build one’s portfolio, it is best to have a solid grasp of the underlying concepts of the formula.
Using Market Capitalization to build a portfolio
Some investors when looking at the potential of cryptocurrency merely look to a coin’s price as the indicator of its worth. But the price of a coin alone does not tell the full picture of the currency’s overall value. By using the Market Cap formula investors can get a better insight into the value of a coin in proportion to its volume and its potential. In essence, a coin having a higher price does not necessarily equate to a crypto asset having a higher value overall.
If ‘CryptoCoin A’ has 500,000 coins in circulation and a single coin is worth $1, the market cap is $500,000.
If ‘CryptoCoin B’ has 200,000 coins in circulation and a single coin is worth $2, then the market cap is $400,000.
From this example, you can see that even though ‘CryptoCoin B’ has a higher price per coin, ‘CryptoCoin A’ has a higher overall Market Cap, and it is this higher Market Cap that can give investors better insight into an asset.
Larger Market Cap cryptocurrencies, usually that of $10 Billion or more, are thought to be more secure, and less prone to bouts of volatility. For some this potential for stability mitigates some of the potentials for dramatic losses, but conversely reduces the potential for larger gains.
While it is largely true that a high market cap is less volatile, it is wise to understand that it can still be moved by unforeseen upsets in the market.
But as the Market Cap of a cryptocurrency starts going beneath $10 Billion and again below $1 Billion the potential for volatility increases, and interestingly so does the potential for dramatic profit. As such Market Cap is a useful indicator of the nature of a crypto asset and its place within one’s portfolio.