Understanding what market capitalization or market cap is, is very important if you are interested in getting into crypto investment. Market capitalization is used as one of the factors when making investment decisions. When trading on crypto exchanges, you will first check the price and the market cap. By understanding how market caps work, you can make decisions as to when to buy and sell with more certainty and minimize risk when investing.
What is Market Cap and How to Calculate It
Market cap is a metric that shows the value of an asset in the market. The market cap is used to calculate the stocks or cryptocurrencies’ prices.
In stocks, the market cap measures the value of security against other securities. This is usually calculated by multiplying the number of shares outstanding and the current share price. In crypto, the market cap serves to identify the value of digital assets and to compare them with other similar assets. Similar to how the market cap for stock is calculated, in crypto you can do this by multiplying the current market price of the crypto asset by its quantity in the market. For example, cryptocurrency A has a total supply of 500 thousand coins in the market. If the coin is worth $2, then the market cap is $2 x 500 thousand coins = $1,000,000. You can also check this information on platforms that provide market cap information.
Market Cap Classification in Crypto
In the market, there are four types of market cap classifications that will help you to determine the best asset to buy or make other investment decisions in crypto. The following is an explanation for each type of classification:
Assets with a large market cap are considered to be the safest crypto investment asset. Crypto assets that are categorized as large-cap are assessed to have a market capitalization of more than 10 billion US dollars. Buying large-cap assets as an investment is a common strategy and is also safe to do because this type already has a good long term track record. In addition, crypto-assets that are included in the large-cap market have high liquidity. Types of crypto that fit this category are Bitcoin and Ethereum.
For mid-cap assets, the assets have a capitalization value of between 1 billion and 10 billion US dollars. Generally, this type of asset is considered riskier even though it still has good upside potential. Mid-cap crypto assets have a tendency to perform well in the long term. Cryptocurrencies into the mid-cap category are Litecoin, Cardano, and Monero.
This classification has a market capitalization value of between 100 million and 1 billion US dollars. Crypto assets in small caps have a highly volatile value and are considered very risky although some of them have a lot of growth potential in the short term. An example of a cryptocurrency from this category is Dogecoin.
A large or small market cap can indicate which type of digital currency will be resistant to volatility. This is because assets with a small market capitalization will be more unstable when there is big news hits the market, or with a whale (big buyer) who dominates the market. In this case, holders of crypto assets that fall into the small-cap or micro-cap categories will be at greater risk of having their prices crushed by larger traders. In order to minimize the risk of investing in crypto, portfolio diversification needs to be done by investing in several companies with different market cap sizes.