Cryptocurrency has been viewed as a natural evolution of money and has brought some terms and practices similar to those used in traditional finance circles. A conspicuous term now used in the virtual currency space is market capitalization which exists in both worlds.
In the traditional finance sector especially in the stock market, market capitalization is used to give a glimpse into what a company actually is worth in terms of finances. In these circles, the worth of a company is calculated by multiplying the number of shares by the current share price.
Introduction to cryptocurrency market capitalization
Similar to the stock market, market capitalization in the cryptocurrency space is calculated by multiplying the total number of crypto coins in circulation with the current price of the coin. With the fluctuating prices of digital currencies, the market capitalization also fluctuates within an equal measure.
With such fluctuations, some view cryptocurrency market capitalization as just numbers that do not really have any meaningful pointers as to where a cryptocurrency is headed in the near future.
But this does not mean that the crypto market cap is to be entirely ignored.
Below is a compilation of 3 great lessons that can be picked just by glancing at the cryptocurrency market capitalization of a virtual currency.
1 Demand level
This one is straightforward. Since the market cap is calculated from the number of coins in supply and its individual price at a tangent, the more people buy in, the higher the market capitalization of that coin.
Some of the major factors that are likely to shift a crypto demand levels include:
With more cryptocurrency coins being staged every day, adoption becomes the only way to measure their worthiness. People are likely to be involved with a crypto that has a use case even if it’s in the future. With a use case, a crypto is viewed by traders and investors to have greater returns and will probably exist to eternity.
For example, the cryptocurrency market capitalization for coins such as ethereum is high. This is because more people have invested in it since it has proven to provide a development platform for decentralized apps. With Dapps seen as the in-thing in the blockchain and cryptocurrency fields, people trust ethereum to be around and provide better services in the future. Which is likely to push its price upwards.
Negative or positive views
This has for the longest time been used to drive the demand level of digital currencies. The demand level of a cryptocurrency is greatly tied to what opinions people currently have. Positive news drives both the prices and brings more people to buy a certain coin while negative news makes people steer away from a cryptocurrency.
Market news can be anything from a hack into a coin’s underlying technology, a breach into the security of a cryptocurrency exchange, or regulatory decisions which have either affected the cryptocurrency positively or negatively.
2 The future
While this is debatable, cryptocurrency market capitalization can be used to evaluate where the coin is headed even with fluctuations.
For example, the market capitalization of bitcoin clearly indicates, with so many people invested, bitcoin does not have any signs of just evaporating into the thin air. With most bitcoin investors keen on the long-term benefits of having the coin under their portfolio, the future looks promising.
The promise of a bright future requires a crypto to be stable enough to handle fluctuations, especially declining prices, gracefully.
While cryptocurrency market capitalization is a key pointer into the future of a virtual currency, other aspects also come into play.
3 Investment opportunity
A low cryptocurrency market capitalization does not always mean that the coin is to be left behind in your portfolio. First, a low capitalization (provided the creators of the coin do not cash out each time a person invests and provided it’s not a scam) indicates that the coin has potential growth. Getting it when the price is still low and being ready to ride through the ‘better and for worse’ phases of the coin means you have higher chances of making a profit.
As more people buy in, the cryptocurrency market capitalization keeps getting higher and the price also shifts upwards almost proportionately.
But there’s a contradicting theory here. Take XRP for example, it’s currently at around 40 cents. If you decide to buy XRP right now and sell when the coin gets to $1, the market capitalization which currently stands somewhere close to $20 billion, will have to jump to around 50 billion which is not practical at least in the near future. The coin jumped in price when its developers announced a major adoption by financial institutions across the globe.
Therefore, even with a huge cryptocurrency market capitalization, the timeframe it will take before increasing in value should be a major factor before investing.
As we have discussed above, cryptocurrency market capitalization shouldn’t be passed by as just another meaningless value but coupled with other variables, it should be among the major factors to consider before investing or drawing any conclusion regarding a particular cryptocurrency.
If you used to ignore it, now is the time to pay attention to the cryptocurrency market capitalization whether on coinmarketcap or any other website that indicates the market capitalization of different virtual currencies.