At the end of an exhilarating bull run, the cryptocurrency market now has a capitalization of $170 billion. That is a huge number to boot. But an even bigger question that needs to be answered here is why does this figure even matter. Why is market capitalization so important?
Market capitalization is a well-known metric for traditional securities but has unique implications in cryptocurrencies too. Market capitalization is a measure of the value of security. It usually consists of multiplying the amount of outstanding stock shares by the current stock price. In crypto, it’s defined as the circulating supply of tokens multiplied by the current price. If a coin has 100 tokens outstanding and is trading for $10 a coin, it has a market cap of $1000. There are around 16.6 million bitcoins in existence, and the price is around $5600 at the time of writing. Bitcoin’s market cap, therefore, is roughly $94 billion which is almost 50% of the total market cap, currently.
Usually, stocks and bonds have been analyzed through financial metrics and ratios. Measures like price-to-earnings ratio, earnings per share, the current ratio, earnings growth, and so on are used to examine stocks. However, crypto teams generally do not publish financial statements, what metrics that do exist become all the more important Market cap provides a quick and easy check on how valuable a cryptocurrency is similar to a company. It reflects the net worth of that particular organization. Bitcoin is sitting at roughly $94 billion. Ethereum is the second-biggest, at $32 billion. Ripple ($10 billion, Bitcoin Cash ($5 billion), and Litecoin ($3 billion) round out the top 5. Bitcoin, by virtue of its size, constitutes more than 50% of the market cap of the entire crypto universe. A high or low market cap can reveal a coin that is resistant to volatility, or vulnerable. Coins with small market caps consequently rock more when big news hits the market, or large buyers take positions. That isn’t inherently surprising – the crypto markets are among the most volatile in the world. But holders of tokens with small market caps are at risk of being crushed by larger traders. If several large buyers team together to sell at the same time, the price of a token can crash to nothing instantly. This would be much tougher with Bitcoin and Ethereum, which have large market caps and are not easily manipulated.