Market capitalization or market cap is the public perceived market value of a particular tradable physical asset, such as gold, or digital asset, such as Bitcoin. In the context of cryptocurrencies, the market cap equals the number of circulated coins or tokens in the market multiplied by the current market price. In the stock market, it is the number of shares outstanding times the current market price. Let’s break down the crypto market cap formula:
The forces of supply and demand determine the price of a coin or token. As more buyers demand a particular coin or token, the price will go up, and as demand decreases, prices go down. Similarly, when the number of sellers exceeds the number of buyers, the price drops, and the opposite holds.
Both buyers and sellers set the prices according to their sentiment and perceived value of a particular coin. If it is undervalued, investors will buy it, and thus the price will increase to its fair value. If it is overvalued, more people will sell, and thus the price will decrease.
News paly a role in changing the dynamics of supply and demand. As news outlets broadcast positive news, prices skyrocket to reflect the new information in the price. Conversely, as negative news become public, holders rush to sell, creating down pressure on the price.
To learn more, read: Bitcoin price volatility, why does it fluctuate so much?
The circulating supply
Circulating supply is the number of coins or tokens that already exist in the market. It excludes any coins or tokens locked in reserve or not yet mined or minted. All being equal, as more coins are mined or released, supply increases increase, and prices drop. Conversely, when coins or token are taken from circulation by burning them, prices increase more coins. In other words, Anything that disturbs the supply of the coins in either direction will result in price appreciation or depression.
To learn more, read: the difference between max, total, and circulating supply.
There you have it market cap = price X circulating supply which reflects the total market value of a particular asset by investors who bid a price according to their perception of how much an asset is worth.
More about the market cap formula
Market cap or market capitalization is an indicator that tracks and measures the market value of a particular coin or token and its dominance in the market in ration to other coins. So, the higher the market capitalization of a cryptocurrency, the more valuable and popular it is compared to low market cap coins or tokens.
On this account, coins and tokens are ranked according to market capitalization, and therefore dominance. Bitcoin is ranked number one since it has the largest market cap of around one trillion dollars as of October 2021. The rest of the crypto market has a market cap of another one trillion dollars. In this way, Bitcoin has a 50% crypto market dominance. With shrinking supply and exploding demand, the price of bitcoin has never been higher, standing at $58000 per coin at the time of writing this article
Market cap layers and divisions
Large-cap cryptocurrencies of $10B or more are generally considered safer investments than smaller-cap projects. They are also relatively less volatile than less established coins and have steady growth potential.
Mid-cap cryptocurrencies are riskier than large-cap. But they tend to have more upside potential than $ 10B + cryptocurrencies.
Small-cap cryptocurrencies are often extremely volatile and considered risky investments, albeit sometimes with high potential.