What Does Crypto Market Cap Means and Why Is It Important

Planning to bet your fortune in the crypto market, but worried about the volatile market trends?

Investing in the crypto market is tricky. If you are new to the crypto market, you may find it extremely hard to grasp the market trends to strategize your investments. 

One key metric that will help you make informed investment decisions is the crypto market cap.

You might be familiar with the term “ market cap” in the context of the stock market or have seen it popping up frequently in crypto circles. 

It’s a much-talked-about term in the crypto world because the crypto market cap helps to identify safer investments and returns.

In this article, we are going to understand the market cap, its significance, and its limitations.

What Exactly is Crypto Market Cap?

The crypto market cap or capitalization refers to the total value of a particular cryptocurrency in the market. It is calculated by multiplying the value of a single currency by the total number of coins in circulation.

Here is how you calculate crypto market cap:

For example, if the value of a single cryptocurrency ‘X’ is 5 dollars, and there are 100 ‘X’ crypto coins in circulation. 

Then, 

The crypto market cap or capitalization = 5*100 = 500 dollars

Based on crypto market capitalization, the crypto coins in the market can be divided into 3 types: Large-cap cryptocurrencies, Mid-cap cryptocurrencies, and Small-cap cryptocurrencies.

Types of Crypto Market Cap

The crypto market cap gives you a bird’s-eye view of a particular cryptocurrency.

Here is a detailed look at the importance of the crypto market cap in a volatile crypto market.

Why Does the Crypto Market Cap Matter?

The crypto market cap is a significant metric to determine risks, potential returns, and formulate investment strategies.

1. To Gauge the Associated Risks

The crypto market is highly volatile. Amidst these uncertainties, the market cap or capitalization helps to assess the risk associated with investing in a particular cryptocurrency.

For example, the large-cap cryptocurrencies like Bitcoin are generally more stable and less volatile. Thus, carry a lower risk. 

On the other hand, lower-cap crypto currencies carry higher risk.

2. To Understand the Growth Potential of a Cryptocurrency

The cryptocurrencies with a higher market cap are the most popular ones. Hence, they have higher potential long-term growth.

3. To Gauge Investor Confidence and Formulate Investment Strategies

More investors are drawn to cryptocurrencies with a higher market cap compared to those with a lower market cap. 

These institutional and established investments drawing into the cryptocurrencies with a large market cap will further stabilize and reinforce their value. This makes the large-cap cryptocurrencies more stable and safer investments.

Moreover, you can also check which is bullish and further strategize your investment. 

Despite its significance, the market cap also has limitations.

Also Read: How to Safely Store and Use Bitcoin?

Does Crypto Market Cap have Limitations?

Though the crypto market cap is crucial for navigating the crypto market. It is not the sole metric to consider while investing due to the following reasons.

• The Large-cap cryptocurrencies may have limited liquidity, making it difficult to buy or sell.
• A higher market cap does not automatically translate into higher profit, as it does not comprehensively represent the financial health of a particular project.
• The market cap is not entirely reliable as it is sometimes subject to manipulation. 

For example, some projects may include unreleased or illiquid coins and tokens while calculating the market cap. This artificially inflates the value.

Final Thoughts on Crypto Market Cap

The crypto market cap is a metric that will help you understand the risks associated with investments in the crypto market, the stability of each cryptocurrency, its popularity, and its growth prospects.

Despite its significance, the higher market cap is not the sole metric that can guarantee safer investment, as it is also subject to limitations like manipulation.

Do detailed research before investing and keep yourself updated about the latest trends in the crypto market to avoid risks.