What Does Crypto Market Cap Mean?
Have you just begun your cryptocurrency investment journey or want a quick refresher course? If so, you may be wondering, “What does crypto market cap mean?” Pelicoin is here to give you the answers you need. This blog post explores what market cap is, how to calculate it, how crypto market caps are categorized, and more.
“What Does Crypto Market Cap Mean?”: A Breakdown
Market cap is short for market capitalization, and it is a metric applied to the traditional stock market and cryptocurrency markets alike. It determines the worth of a company’s shares, and as such, a higher market cap indicates that a company is performing well and likely a large player in its industry.
Determining market cap does differ slightly for crypto than other markets, but its guiding principle remains the same: the market cap is proportional to the cryptocurrency’s worth.
So why do investors consider market cap before investing in a company? Oftentimes, the market cap can indicate the potential for risk and reward for an investment. Large-cap companies—which are covered in more detail in the “Market Cap Categories” section—are typically better-known and more established than small-cap companies. Because of that, investing in large-cap stocks is most often seen as a lower-risk investment and more likely to be profitable.
How to Calculate Market Cap
Calculating market cap varies slightly between traditional stock companies and cryptocurrency companies. Let’s investigate their differences in more detail.
For the Traditional Stock Market
In order to calculate the market cap of a typical stock company, investors use the following formula: Market Cap = Number of Outstanding Shares x Current Price of One Share.
Let’s demonstrate with an example. If a company has sold 1,000 shares of its stock and each share is currently valued at $50, the company’s market capitalization is $50,000. As such, if this company wants to increase its market cap, it can do so by striving to sell more shares and/or by increasing the value of each individual share. Improving its market capitalization will demonstrate to investors that the company is a reliable investment.
For the Cryptocurrency Market
Cryptocurrency’s approach to market capitalization differs due to the fact that its value is not based on a tangible product or service but rather a digital currency. Crypto’s worth is generally determined through the diluted market cap formula: Diluted Market Cap = Number of Shares Authorized x Current Price of One Share.
Let’s say a new cryptocurrency start-up has emerged onto the market. They have 20 million coins to mine and sell, and currently, they have mined 1 million coins, each valued at $15. The standard market cap would be $15 million, given that 1 million shares have been sold for $15 each.
The diluted market cap, by comparison, would be $300 million. This is because there are 20 million coins authorized, and their current value is $15 per coin. As you can see, diluted market cap is a means of estimating a crypto company’s full value. It approximates how much it will be worth upon selling all of its shares.
Market Cap Categories
As we continue to explore the question, “What does crypto market cap mean?” it is necessary to note that market caps fall into three different categories: small-cap, mid-cap, and large-cap. The categories are divided up based on their value. The ranges for each market cap type are as follows:
Small-Cap: worth less than $1 billion
Mid-Cap: values fall between $1 billion and $10 billion
Large-Cap: value is greater than $10 billion
Of the three types, small-caps are considered the most volatile, and as a result, they are also the riskiest category. Although investors are more prone to losing money when investing in small-cap crypto, they may choose to invest anyway because of the higher likelihood that the company will explode in value. Investing in small-cap companies can lead to a loss but can amount to a significant return just as quickly.
Large caps fall on the other end of the spectrum. They are known for being significantly more stable, so investors can eliminate most concerns of losing their investments. However, this comes with the drawback of making it harder to make a significant return. Since the stocks don’t fluctuate as much, investors will need to see substantial growth in their crypto’s worth. Bitcoin falls under the large-cap umbrella.
Mid-cap companies fall right in the middle, balancing the pros and cons of the other two categories. They offer moderate stability, though significant returns won’t arrive as rapidly as small caps.
Crypto Market Cap’s Limitations
While market cap can be used to estimate how risky an investment might be quickly, it has its challenges. It cannot be used as a sole metric for identifying the worth of a company; equity value alone describes its total worth.
Likewise, the market cap does not describe the acquisition cost of a company. That is more closely tied to a business enterprise value.
Market Cap and Bitcoin ATMs
The ever-growing prevalence of Bitcoin ATMs is making investing in Bitcoin and other crypto on the go more accessible than ever. Although using a Bitcoin ATM does not directly impact a company’s crypto market cap, the fact that crypto is more accessible does mean that the market is more prone to fluctuation. As crypto ATMs become more common—and, as a result, more frequently used—crypto companies and their investors will likely see more returns on their investments.
Invest in Crypto Safely with Pelicoin
Now that you have all the answers to “What does crypto market cap mean?” you are better prepared for your next crypto investment. After all, you can now make a more informed decision regarding risk and reward in the cryptocurrency market.
However, security in crypto goes beyond making a return on your investment; it is also essential to protect your identity as you invest. For that reason, complete your next transaction with Pelicoin! We offer highly secure Bitcoin ATMs throughout Louisiana, Texas, Tennessee, and Mississippi, and we pride ourselves on a user-friendly interface that makes investing a snap.
To learn more about Pelicoin, check out our blog or get in contact with us today.