Market capitalization is a central concept to financial assets. Crypto-traders may know it primarily from cryptocurrencies but it exists for every financial asset. Yet what exactly is market capitalization? How do you calculate it? And why is it especially important with cryptocurrencies?
What is market capitalization?
A general definition is that the market capitalization of any financial asset describes the total value of all units of an asset at any given moment. This is done by multiplying the total amount of outstanding units of that asset with the current market price per unit.
Hence, the market capitalization constantly changes as the price of each unit of the asset increases or decreases – according to supply and demand.
How is it calculated and where to find it?
The generic formula to calculate market capitalization is:
Total amount of outstanding/issued units * current market price per unit
For stocks, the market capitalization is usually calculated using the number of all outstanding shares as the “issued unit”. With cryptocurrencies, we utilize the total number of tokens issued as the unit of account.
Theoretically, a total market cap can also be calculated for an entire asset class like cryptocurrencies. In this case, it is referred to as “total market capitalization” as it represents the entire market for that asset class.
Why Market Cap Matters (With Crypto)
The concept of market capitalization is more important with crypto currencies than any other asset class. This is especially because it says how important and popular a cryptocurrency already is in comparison to the thousands of other coins out there.
The higher the market capitalization of a cryptocurrency, the more important the project itself and its token is, the higher the liquidity when trading the cryptocurrency/token and the more people know about and have been exposed to the project’s idea or ecosystem.
There are three additional reasons as to why market cap is one of the central metrics looked at with cryptocurrencies:
1. The volatile size of this young asset class.
The concept of total market capitalization is most observed for the young asset class of cryptocurrencies as analysts want to know how big this asset class is to all the other established and older asset classes like stocks, bonds, futures, commodities, etc.
The size of the crypto market is observed especially with an eye towards the KPI of “Bitcoin dominance”. This important KPI describes what percentage of the total market cap for cryptocurrencies is made up by Bitcoin’s market capitalization (Formula: BTC MC / TMC Crypto).
2. Categorization of coins by market cap.
As you probably know, with cryptocurrencies there is Bitcoin and Altcoins. However, more recently a finer categorization of altcoins by market capitalization has evolved in the crypto-community. While there is no official definition for that categorization, it roughly goes as follows:
- Large cap (> 1bn USD market cap)
- Mid cap (500mn – 1bn USD market cap)
- Small cap (100mn – 500bn USD market cap)
- Micro cap (< 100mn USD market cap)
3. Money flow between categories of coins.
Quantitative analysts and crypto-traders pay a lot of attention to the market capitalization of various categories of cryptocurrencies in order to look at where the money is flowing. Much of the time the money does not flow out of the crypto-market, but it flows between categories of cryptos. In more bearish times, money flows from higher-volatile altcoins to Bitcoin, in case of bullish market sentiment, money often flows from Bitcoin to the higher risk altcoins.