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 stocks, the market cap is the number of shares outstanding multiplied the current market price.
The prices of stocks, cryptocurrencies, or any other tradable asset, do not reflect their intrinsic or true value. They reflect the general public views and perceptions by the forces of supply and demand on the sell and buy-side, respectively, which determine the price of a coin or token.
As more buyers demand a particular coin, 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 on exchanges according to their sentiment and perceived value of a particular coin. If the coin is undervalued, more will buy it, and thus, the price will increase to its fair value. If it is overvalued, more will sell, and thus the price will decrease.
News plays a role in changing the dynamics of supply and demand. For example, as positive news becomes public, the price skyrockets to reflect the new information in the price. Contrarily, when negative news becomes public, holders rush to sell, creating down pressure on the price.
The circulating supply
The circulating supply is the number of coins or tokens that currently exist in the market. Anything that disturbs the coins or tokens supply in either direction will result in price appreciation or depression.
Adding more coins or tokens to the circulating supply will create downward pressure on the price. Conversely, when burning existing coins or tokens or reaching the max supply, the price will increase as coins become more scarce.
There you have it now: market cap = price X circulating supply, which reflects the total dollar market value of a particular asset.
Note, the circulating supply should not be confused with total and max supply. To learn more, read: the difference between circulating, total and max supply.
Market cap implications
The market cap measures the market dominance of an asset class. In cryptocurrencies, bitcoin has the largest market cap with nearly 50% dominance. The market cap of all cryptocurrencies is around 2 trillion dollars, and bitcoin alone captures 1 trillion as of 2021.
As the circulating supply decreases or remains constant or approaches its max supply and the price increases, the market cap increases. For example, the current circulating supply of bitcoin is around 18.8M coins, and this number will reach its max at 21M in the future. After that, no bitcoin will ever be created, pushing the price upward because of the scarcity. The current market price of bitcoin is around 48K with a circulating supply of 18.8M approximately, which gives us a market cap of 902B.
Generally, large-cap cryptocurrencies over $10B are relatively considered safe investments. Investing in such coins should be part of a conservative long-term strategy. Such coins are less volatile than others with a lower market cap, but they still can swing remarkably.
Mid-cap cryptocurrencies are riskier but offer more upside potential than high market cap cryptocurrencies. Small-cap cryptocurrencies are often extremely volatile and considered very risky investments, albeit sometimes with short-term and long-term high returns.
Always do your research before you invest in any cryptocurrency especially emerging ones with a low market cap.