The cryptocurrency market capitalization is one of the most intriguing statistics this industry has to offer. It depicts the overall “value” of all crypto-assets, stablecoins, and tokens combined. However, this value can be misleading if you don’t know what the statistic truly means.
What Is The Cryptocurrency Market Capitalization?
Similar to the stock market or foreign currencies, individual crypto-assets have their own market cap. Bitcoin, for example, has a market cap of over $747 billion. It is also the leading cryptocurrency by market cap, as no other asset comes close to reaching these numbers.
Ethereum, number two on the individual rankings, represents a value of $194.5 billion. When combining these two markets and the market capitalization of all other assets, tokens, and stablecoins in this industry, one obtains the full crypto market cap. It has grown by leaps and bounds over the years and currently sits well above the $1.2 billion mark.
As this value rises, one may be inclined to think that all cryptocurrencies are performing well. That is not always the case, as individual projects can either follow or oppose the current industry-wide trend. Never confuse the cryptocurrency market capitalization with individual projects’ performance, as this number is only the sum of its parts on paper.
Understanding The Numbers
As mentioned before, the total market capitalization is the sum of all individual market caps of every project tracked as part of the cryptocurrency industry. Newcomers may think it is just Bitcoin and Ethereum, but thousands of projects have some value. How high that value is, differs significantly from one project to the next.
Given the rate at which new crypto-assets and tokens are created – especially in DeFi – one may think the cryptocurrency market capitalization can only go up. That is, unfortunately, far from the truth. The most recent bear market affected all projects, driving the market cap below $300 million.
Moreover, not all projects remain active forever. It is only normal to see some ventures disappear into obscurity, as developing and maintaining a crypto project is a daunting task. A lot of altcoins and DeFi projects come and go, but Bitcoin will always be around.
How To Calculate The Individual Market Cap
For those unfamiliar with the entire concept behind a “market capitalization,” one can use a simple formula to calculate the project’s value:
The circulating supply x price per asset = market cap.
As an example:
UNI (the native Uniswap token) has a circulating supply of 298.865,410 coins. Its value per coin is $17.74.
298,865,410 x 17.74 = a market cap of $5,310,138.157
Despite knowing these figures and calculations, no two projects are equal. One may have a higher value than the other because of many potential reasons. Individual coins can have a lower value but a very high circulating supply to achieve a higher market cap. Others may have a high value and lower supply yet obtain a nearly identical market capitalization.
What Is Included In The Total Crypto Market Capitalization?
It is common to divide the cryptocurrency space into different segments:
- Cryptocurrencies (Bitcoin, Ethereum,…)
- Stablecoins (USDT, USDC, BUSD,….)
- Tokens (issued on a layer like Ethereum)
- DeFi assets (native instruments of decentralized finance platforms).
When calculating the total crypto market capitalization, you need to account for all of these projects. With over 6,000 projects on the market today, such calculations can take a while. Thankfully, some data aggregators calculate these big numbers on behalf of the users.
In the screenshot above, one can see the current crypto market capitalization. Compared to a few years ago, the landscape looks very different today. Part of that is due to the number of assets on the market, but there’s also the rising value of Bitcoin and others.
Keeping in mind how volatile all of these markets are, fluctuations will occur regularly. A shift in individual values of these currencies will affect the overall market cap negatively or positively. These figures will likely shift around every day but may look very different in the future.
The Importance Of This Metric
Crunching the numbers is one crucial aspect, but figuring out the real value is a different matter. To the average onlooker, a crypto market cap makes little to no sense. Nor does it matter to them whether the value goes up or down.
In most cases, people will use the crypto market cap as a comparison tool against other industries. As Bitcoin and consorts are “competing” against traditional markets such as stocks, bonds, foreign currencies, or precious metals, these correlations may not always serve a purpose.
That said, it is still an intriguing way of looking at the broader industry in a different light. While it may not lead to any meaningful insights – either short-term or long-term – those passionate about this industry hope to see the numbers go up indefinitely.
It Is A Misleading Statistic
When looking at the combined total value of many different projects, the result only tells part of the story. Even if the crypto market capitalization keeps rising, it is never an indicator of overall market sentiment. Those who rely on this figure for financial decisions are often worse for wear.
Just because the total crypto market cap is rising doesn’t mean every individual project is worth investing in. Onlookers, traders, and speculators need to conduct thorough research before committing any money to this industry. The vast majority of altcoins, tokens, and DeFi assets have no long-term future, and their current value may be the result of price manipulation.
Additionally, one has to distinguish between currencies whose circulating supply is the maximum supply and those with different metrics. If the circulating supply is below the maximum supply, the current market capitalization is far from correct. It may end up much higher or lower, making it an unpredictable factor.
In the end, the crypto market capitalization is nothing but a number that represents the current situation. It has no ties to the past or future, making its “value” and importance nearly neglectable. In the grand scheme of things, it has no real meaning, other than the interpretation people want to associate with it.
Exploring The Diluted Market Cap
The vast majority of cryptocurrencies – not tokens, assets, or stablecoins – have a circulating supply and a diluted market cap. What makes this diluted metric intriguing is how it takes the maximum supply of that cryptocurrency into account to derive the proper market capitalization.
Taking Bitcoin as an example, it has a maximum supply of 21 million BTC. However, the circulating supply is 18,622,218 BTC. As such, its market cap is 18,622,218 x $37,652 (the current price), yielding a value of $701,174,143,334.
If one were to calculate the diluted market cap, it requires using the maximum supply of 21,000,000. The calculation is 21,000,000 x $37,652, yielding a value of $790.692.000.000. It is not a big difference, but certainly something to be aware of.
You can apply this same calculation to all other cryptocurrencies, assets, and tokens. However, not all currencies have a fixed maximum supply like Bitcoin. Instead, those currencies have an “inflationary supply,” an aspect commonly found with Proof-of-Stake currencies.
For those who enjoy comparing these statistics, the diluted market cap isn’t “better” or “worse” than the average market cap. However, it can offer a different perspective on the project, assuming its price will never go higher. The price will go higher in most cases, assuming the maximum supply doesn’t reach absurd numbers and the project has a solid foundation and future.
What About Deflationary Tokens?
On paper, one is tempted to think all cryptocurrencies, tokens, assets, and stablecoins have a circulating supply that will only keep going up. Some, like Bitcoin, have a fixed maximum in place to ensure scarcity remains an aspect.
However, there are projects which take an entirely different approach. Instead of continually increasing the circulating supply, they maintain a deflationary solution. The result is how the circulating supply will decrease over time, creating an aura of scarcity. Such an approach is common among assets that have incredibly high circulating supplies in the first place.
Several examples of deflationary tokens exist today. Binance Coin, for example, is the native asset of the Binance Exchange ecosystem. Every quarter, the company buys back tokens from the secondary market and sends them to an address incapable of spending the money, a process known as “burning“.
Through these buybacks, the circulating supply of BNB keeps dropping every quarter. That doesn’t automatically make the asset more valuable by definition, but it is an excellent example of using deflation as a tool. In most cases, traders and speculators hope to see the value of their deflationary holdings increase, but that only happens if a project has solid fundamentals and a viable long-term development roadmap.
Thanks to this token’s deflationary nature, its diluted market cap will shift around from quarter to quarter. There is no “fixed” amount of BNB Binance will buy back every quarter, making it challenging to calculate Binance Coin’s diluted market cap.
Price And Value Aren’t The Same
To the average onlooker, a cryptocurrency market capitalization may seem like an indication of value. In reality, it is not, as it merely represents the price of which individual assets trade for at this time. It is not uncommon to see individual projects vastly over-or underpriced compared to their relative value.
Market caps hardly ever replace an asset’s value, but solely what traders think is a fair price right now. Most trading is fueled by greed and irrational sentiment, making projects seem more valuable than they are. While value doesn’t necessarily mean much for trading purposes, those who see cryptocurrencies as a long-term investment may disagree.
Value in this industry can pertain to new use cases, groundbreaking technology, broader adoption, and many other factors. None of these factors apply today to most projects, yet their price and market cap can still go up overnight. Projects that offer genuine value may not always have the highest market cap, warranting fundamental research before investing in any market.
The same concept applies when a market cap goes up or down by a steep amount. It doesn’t mean so much money has entered or left the liquidity side of the equation. Instead, it means the asset’s price goes up or down, and that effect is compounded by multiplying it by the circulating supply. In reality, traders of $10,000 or more are less frequent than you may think.
The cryptocurrency market capitalization is an intriguing statistic, but no one should overstate its importance either. It is merely a collection of the combined values of individual cryptocurrencies, assets, tokens, and stablecoins. It is subject to a lot of potential manipulation and does not represent the real value of individual projects or the industry as a whole.
As a metric, it can offer some insights, but only when traders and users perform a more fundamental analysis of what is going on behind the scenes. There is always a lot more to cryptocurrencies and their value other than the numbers one can see on data aggregator platforms. Finding the real value of these projects – other than speculative value – is often much more challenging.
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