Market cap (capitalization) is one of the first metrics that crypto investors check when choosing their next investment. Among other metrics, market cap offers insight into how popular and dominant the coin is.
This article explains what crypto market cap is and why it is important.
Market Cap: The Basics
Market cap is calculated by multiplying the coin’s current price by the number of coins in circulation.
Current Price x Circulating Supply = Market Cap
There are several popular online services that provide data on the market cap of crypto assets. Coinmarketcap is the most popular platform where you can check current market cap statistics. The website downloads and systemizes data from various exchanges and shares the volume-weighted average.
Coinmarketcap also has data on the coin’s price and its recent fluctuations, total trading volume, and circulating supply (which is way more important than the total supply).
Many novice investors do not take market cap into consideration when they shop for coins to add to their portfolio, assuming that the greater the price of an asset, the higher their chances of making a profit. Unfortunately, that strategy does not always work in their favor.
Prices of cryptocurrencies are highly volatile and can change drastically within days. When checking the bottom of the crypto market cap list, you may find a lot of expensive coins you have probably never heard of. In the world of digital assets, artificially high prices are not uncommon. And on the contrary, the top of the crypto market cap list features a handful of reputable coins with low prices.
Using Market Cap in Making Investment Decisions
Admittedly, if you are looking to invest in a coin, market capitalization matters. However, if you do not do additional research and stick to the top currencies from the crypto market cap list, you will only get to apply a safe and conservative strategy.
Coins and tokens with the highest market capitalization, also known as large-caps, are typically the least volatile ones and often lack growth potential. Large-caps are best for long-term investment strategies.
Tokens and coins from the middle of the list, mid-caps, are more volatile and can potentially grow faster. High-risk small-cap cryptocurrencies are the most unpredictable – while many crash, some demonstrate impressive short-term growth.
Weighted Market Cap
A weighted market cap strategy can work for all three types of assets, be it small-cap, mid-cap or large-cap cryptocurrencies. The idea is to take the total market caps of currencies you are willing to invest in and divide out the percentages each of them holds in the total.
This way, you will allocate larger amounts to safer large-cap coins, and balance your portfolio by investing less in high-risk cryptocurrencies.
The Bottom Line
Market capitalization is an important metric that gives you an idea about a coin’s general worth. Regardless of the investment strategy you choose, your investment decisions should not be based solely on market cap and you need to consider a combination of factors, such as the team behind the project and its goals, the current state of the market, timing, and others.
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