How Does Market Cap Affect Crypto Price? Explained

Market cap in crypto is the total value of all the crypto coins that have been mined so far. The value of a crypto is not only its price but is largely dependent on its market cap.

You can not find or predict the price of crypto by looking at its prices and you need to know about market cap, what role it plays, and how to find it.  Here, let us read about all that and also how market cap affects crypto price.

Market Capitalization In Crypto

How does market cap affect crypto price?

Market cap or market capitalization in crypto can be defined as the total dollar value of all the coins that have been mined. Market cap is present in stock also and there it is the total dollar value of all the shares of the stock of a particular company.

Prominent cryptocurrencies such as Bitcoin and Ethereum have big market caps, bigger than $10 billion. These are large-cap cryptocurrencies and are considered to have relatively smaller risks. It has high liquidity meaning that even if a big volume of people cash out from it the prices will not suffer a huge loss.

There are mid-cap cryptos and small-cap cryptos. Mid-cap cryptocurrencies have market caps between 1 billion US dollars and 10 billion US dollars. Small-cap cryptos have market caps that are below 1 billion US dollars.

What is market cap? How To Find Market Cap?

Let us explain this with an example

  • Imagine there is a cryptocurrency named ‘X’

‘X’ has a total of 2000 coins in circulation in the market
Each of these coin is worth $1
Therefore, the market cap of ‘X’ is $2000 (1 x 2000 = 2000)

Now let us say,

  • There is another cryptocurrency named ‘Y’

“Y’ has a total of 2000 coins in circulation in the market. – The same as ‘X’
However, each of the ‘Y’ coins is worth $2
So, the market cap of ‘Y’ is $4000 (2 x 2000 = 4000)

In these two examples, both the crypto coins had the same market circulation. But the latter one had a higher value than the first one. Therefore, the latter one has an overall value bigger than the first one.

  • Now let us say the cryptocurrency ‘Y’ has only 500 coins in circulation in the market

The market cap of ‘Y’ is then 1000 (2 x 500 = 1000).

How Does Market Cap Affect Crypto Price?

Now you know that market cap can be calculated by multiplying the total number of mined coins with the current price of one crypto. The stability of crypto is decided by the demand and the value it has in the market. If the market cap of a crypto coin is higher, then it has more stability. Potential investors often choose to invest in crypto with a higher market cap.

Market cap can also be used to determine whether the crypto has the potential to grow and you can also find whether it is a good long-term investment.

Indicates stability

Market cap can be used to determine the stability of a crypto coin. If a coin has a higher market cap it means that it has higher demand in the market and it has more stability.

Assess risk

It is used by crypto analysts to determine the risks associated with the crypto. You can use it to find the risk and reward ratio. If a particular coin has a smaller market cap, it means that it has a higher risk. The coins with smaller risk will have a bigger market cap

Indicates liquidity

If you know the market cap of crypto, then you can easily assess the liquidity of the crypto. If there is a higher market cap, it means that the crypto has better liquidity.

Analyze trend

Analyzing the market cap frequently will help you to get an earlier insight into the price changes that may happen to crypto.

All these factors give the market cap a crucial role in affecting the price of crypto. The market cap can greatly influence the perceived value of crypto as well as investor sentiment.

The Bottom Line

The role of market cap can not be considered less when it comes to crypto. Analyzing the market cap can help you to find and determine many factors about crypto. Note that, just noting and tracking the price of a particular crypto coin will not help you to understand it or to predict its details.

Leave a Comment

© 2024 eBizMBA Inc. All Rights Reserved