Understanding Coin Market Capitalization for Beginners

INTRODUCTION

There are still many people out there who aren’t that savvy when it comes to cryptocurrencies. So, if you just started investing in crypto, welcome on board!

You may, however, be unaware of the many ways to quantify the value and cost of a new coin that just came up on your radar. A number of newbies observe the price of a coin or token and finding that it is below $1.00, think it is a potential Bitcoin that could amount to $14,000! 

What is needed in such a case, in order to avoid wild goose chases, is to learn more about how to evaluate a specific digital coin and how to assess its real value. That is the mission of Coin Market Cap (capitalization).

Market Capitalization Explained

Market capitalization is the entire dollar market value of the outstanding shares of a firm. Often commonly called market cap, it is arrived at by means of multiplication of the company’s shares outstanding by the current value/price of a single share. 

A company’s size is determined using this figure, as opposed to employing sales or total asset figures. Market cap is simply an abridged form of market capitalization, and it is among the list of the predominant telltale considerations for investors in the process of evaluating a firm. 

In this regard, the same principles employed with the traditional companies are taken and utilized in the crypto asset markets. To get an easier grasp of this, the semblance between traded companies and certain cryptocurrencies will be put into use. 

You can think of individual coins as much the same as shares in a firm. There is a particular quantity of coins available for circulation (some digital coins have accrued value with time while some do “burns” in order to avoid inflation) and contingent upon the demand for these coins the price will begin to fluctuate. 

Coin market capitalization computes the general value of any currency out there in the global markets. That simply means all that is need is for you to discover the sum amount of outstanding shares and multiply that by the price per share.

When such a principle is introduced into the world of cryptocurrencies, instead of looking at the total number of shares, we will be looking at the total number of coins. The vital aspect when determining market capitalization is to have the term “outstanding” in mind in reference to the coins (rudimentarily the crypto equivalent to a “share”). 

That means coin market capitalization will be derived by multiplying the number of outstanding coins by the price per coin. The sum of the number of outstanding coins is not frequently the same as those in circulation. 

Between specific initial coin offerings, commonly called ICOs, allocating a given amount of crypto to be locked up until much later, misplaced wallet keys, and “whales” (who are the investors holding a substantial portion of specific currency), the number of coins really in circulation is rather difficult to know for sure. 

Due to this, you need to reckon that these values are all estimated.

TOTAL NUMBER OF COINS x PRICE PER COIN = MARKET CAPITALIZATION

An easy way to see the total marketing cap of all coins is via this website: www.coinmarketcap.com This is probably the most widely visited website in the entire cryptocurrency world. 

Examples

Bitcoin (BTC) -$138,174,254,784 USD.

As at the time this information was being written down, Bitcoin was trading $8109 USD per one Bitcoin. When one observes the circulating supply to the right, one can use it to determine the market cap. Employing the formula above will let us simply input the numbers.

Coin Market Capitalization = $8109 x 17,039,512 BTC or $138,174,254,784 USD.

Bitcoin is as of recent the largest crypto trading coin by market capitalization, and it has been so for a lot of time now. 

But how about a “small cap” crypto?

Power Ledger (PWR) – $156,358,216.

In contrast to BTC, PWR has a very low market cap. 

Using the sample from the above formula below:

Coin Market Capitalization = $0.419612 x 372,625,702 POWR or $156,358,216.

That leads us to asking what the significance is. 

Well, having calculated the market cap, we now stop to consider its true implication for you as an investor. 

When you are deciding which crypto asset to trade for or invest in, market cap will provide you with some invaluable information. Since coin market cap determines the amount of value which a specific asset has in its offing, it as well has the capacity to give investors an incline of how volatile the asset is likely to be and what upcoming projections can look like. 

Taking BTC for example, the coin has the single largest market capitalization of any coin asset, and due to that, the swings in pricing have the tendency to be less volatile than the smaller market caps. Granted that the percentage change is still gargantuan in comparison to traditional securities such as stocks and FOREX trading, but they are yet more stable than something as PWR.

According to reliable information from Coin Market Cap, PWR has had change of 7% within 24 hours. That’s not so bad for a day’s return. Meanwhile, BTC’s much more modest 24 hour 2.1%. While not bad by any stretch of imagination, the increase will be significantly less than that of the smaller market cap currencies. 

Investors will have to come to terms with the implication that they will need to evaluate exactly what they are on the lookout for in an initial investment, as well as how much risk they will be willing to tolerate. 

For a huge market cap coin like BTC or Ethereum (ETH), changes tend to be less drastic, but as well do not offer astonishing skyrocketing returns as the small market cap coins because of how much room they have to develop.

If you scroll through the front page of Coin Market Cap, another quick example would suffice: 

In the last day alone, We are Satoshi (WSX) has returned 214%, which is incredible. That kind of ROI (return on investment) is just unbelievable by traditional securities metric, but is not at all fresh news in the crypto markets out there. 

However, with no pun intended, there is also another side of this coin. Enigma (ENG) is a stark example of what lies on the other side: risk. These low market cap coins such as ENG can as well experience high volatility on the downside. In the last 24 hours only, ENG has lost 25% of its value. This illustrates that you will need more than just an intention to invest in a small market cap coin; you need guts. 

However, they offer remarkable chances for growth.

CONCLUSION

Having discussed what coin market capitalization is and the means to determine it, what are the vital parts of the calculation and what should investors like you be using it for?

You can use it to arrive at a rough approximation of the rate of volatility a digital coin is likely to be vital to other tokens in the market.

It serves as an approximate implication for the chance of tremendous growth of an asset in the short term.

It is a platform for the comparison and contrasting of various coin assets at different values, since they will both differ in terms of circulating tokens.

It serves as sign to help prognosticate whether assets are really overpriced or a great buy.

I hope this has been useful!  

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