Market cap is a term often spoken in relation to cryptocurrency. Every asset has a market cap.
One of the most popular crypto sites, CoinMarketCap, even ranks tokens by their market caps, so this is a definitely a piece of data you should be familiar with.
How is it worked out?
The market cap of a cryptocurrency is the price per token multiplied by the number of tokens in circulation (circulating supply, not total supply).
For an example, the market cap of Bitcoin is calculated by multiplying the price, we let's say USD10,000, by the total amount of Bitcoin in circulation, we will use 17,415,112.
USD10,000 x 17,415,112 = USD174,151,120,000 market cap
Price, supply and market cap
Market cap is an important indicator of a cryptocurrency's value.
Let's look at some popular coins as an example.
Compare Bitcoin and XRP, both in the top 3 cryptocurrencies by market cap.
XRP currently costs around USD0.31 with a supply of about 40 billion, making for a market cap of just under USD13 billion.
Bitcoin currently costs about USD3,632.68 with a supply of 17.1 million, making for a market cap of just over USD63 billion.
What matters here is the relationship between price, supply and market cap.
People are very often interested in investing in "low price" coins like XRP because they hope that the price will skyrocket into the thousands of dollars.
But when coins have a massive supply, like XRP does, it makes it extremely unlikely, near impossible, for the price of XRP to reach into the hundreds or even thousands of dollars because of market cap.
If the price of XRP were to increase to even USD100, the market cap would be USD4 trillion. It would be illogical to assume XRP could achieve such a massive market cap.
Market cap can show potential growth
Market cap can be used to shows the potential growth a token has, rather than the price. Just because the price per token is low doesn’t mean the coin is an undervalued gem.
But if the price is low and the market cap is low, then the token may have a lot of room for potential growth.
Similarly, if the price is high and the market cap is low, the coin may still have the same potential for growth.
Token price is therefore more or less irrelevant because it is just a function of the supply.
You're investing based on how you think the price will perform, not because of the price per
Market cap doesn't reflect true value
Now we know what market cap is, but here's what it isn't:
The market cap of a token does not represent the amount of money that is stored in that token. The price is reflective of the latest trades that have been made, not the amount of money that has been put into the token.
This is worth keeping in mind.
You would never be able to sell all the tokens for the current market price.
Large sell-offs will substantially drop the price.
Large buying sprees can shift the price up.
Additionally, you should be aware that the circulating supply of a token can change. When a circulating supply increases, the market cap will increase, even if the price stays the same.
With coins that require mining, miners get a reward from mining which increases circulating supply. With other coins, the developers may have locked up a portion of the tokens for different reasons, such as marketing.
If there is a big disparity between the circulating supply and the total supply, you may want to find out why before investing.