Summary

Market capitalization applies to the stock market as much as it does to cryptocurrencies and blockchain projects, which gives an idea of the current market for the cryptocurrency or blockchain network in question value.

The total market capitalization of the entire cryptocurrency industry is also an important indicator. In a sense, total market capitalization can be used to assess the cumulative value of the blockchain and cryptocurrency industry.

Introduction

Calculating the market capitalization of a cryptocurrency project is relatively simple. Most traders are interested in comparing the market capitalization of individual projects, but market capitalization can also be used to look at the big picture.

The total value of all cryptocurrency assets is much higher than that of Bitcoin or Ethereum, even though the two major projects top the list by market capitalization.

All major cryptocurrency data aggregators report total cryptocurrency market capitalization, so this metric is almost at your fingertips. But what does this indicator mean? What market information can be disclosed? Please read this article to find out.

What is cryptocurrency market capitalization?

The current market value of a cryptocurrency network is often referred to simply as "market capitalization" and is calculated by multiplying the circulating supply of the cryptocurrency asset by the unit price.

Suppose there are two networks, namely AliceCoin and BobCoin. The total supply of AliceCoin is 1,000 coins, all of which are in circulation. BobCoin is a proof-of-work chain with a supply cap of 100,000 coins, of which 60,000 are in circulation. AliceCoin's current market price is $100, while BobCoin's is $2. So, which coin has a higher market cap?

Market cap = circulating supply × price

AliceCoin’s market cap = 1,000 × $100 = $100,000

BobCoin’s market cap = 60,000 × $2 = $120,000

Even if the unit price of BobCoin is 50 times cheaper than AliceCoin, the value of the BobCoin network is still higher than that of AliceCoin. This is why market cap is a better way to assess the value of a network than the unit price of a token.

What is the total market capitalization of cryptocurrencies?

Total market cap is the sum of the value of Bitcoin, altcoins, stablecoins, tokens, and all other crypto assets in the market combined. Many believe this metric is important because it gives a complete picture of the size of the industry.

Total cryptocurrency market capitalization since 2013. Source: CoinmarketCap.

Due to the relatively high volatility of the cryptocurrency market, values tend to rise and fall. In the first six and a half years of cryptocurrency’s existence, the total market capitalization has never crossed the $20 billion mark. Since reaching a peak of US$770 billion in 2018, the market value has been fluctuating around US$100 billion.

Why is the total market capitalization of cryptocurrency important?

The total cryptocurrency market capitalization is often used as a benchmark against which other industries in the macroeconomy are compared. For example, many analysts often compare total cryptocurrency market capitalization to the market capitalization of precious metals or stocks.  

Why? Because this can roughly estimate the development of the entire cryptocurrency market in the next few years or even decades.  

However, no one knows what the best way to value cryptocurrency and blockchain projects is. Although these comparisons are useful, they should not be relied upon blindly.

Comparing different financial markets together is often futile. Because different industries attract different types of investors. Stock traders, forex or precious metals speculators do not actively turn their attention to cryptocurrencies. Cryptocurrencies are a booming new asset class that will attract investors who feel the same way.  

Why is the total cryptocurrency market cap misleading?

Making investment decisions based on the total market capitalization of cryptocurrencies can be misleading, and there are many reasons for this.

The first step is to ensure that the market valuation of each project is accurate, calculated by multiplying the supply by the price of each asset.  

However, accurate supply information is difficult to determine. If this data is inaccurate, subsequent calculations will naturally be untenable.

Secondly, the market value of some projects can be manipulated. They do this to create a false sense of security and inflate value. If you only focus on the total market value without delving into its actual significance, it may lead to wrong investment decisions.

Ultimately, total market capitalization is just a value for a specific time period. This value may be hundreds of millions today, billions next week, and only tens of millions six months later. It reflects only a momentary state of the cryptocurrency industry.

Diluted market capitalization of cryptocurrencies

There are many ways to calculate market capitalization on the market, one of which is estimated The method of determining the future value of a network is called "dilutive market capitalization." Let's unravel its mysteries.

The term "dilution of market value" comes from the stock market. In the stock market, this value represents the valuation of a company after all stock options have been exercised and all securities have been converted into shares.

At the same time, it is also important to pay attention to the current and future supply of cryptocurrency assets. Not all cryptocurrencies, tokens and assets have reached supply caps at the time of valuation.

For example, we know that the supply of Bitcoin is capped at 21 million coins. As of today, there are 18.505 million Bitcoins in circulation. Based on a unit price of around US$10,550 per Bitcoin, the market value is approximately US$195.2 billion.

The diluted market capitalization is calculated using the Bitcoin supply limit. Therefore, multiplying 21 million coins by Bitcoin’s current price of $10,550 yields Bitcoin’s diluted market cap, which is approximately $221.5 billion.

The same concept applies to all cryptocurrency assets on the market. The diluted market capitalization is equal to the current price of the asset multiplied by the maximum tradable supply. Considering that asset prices continue to fluctuate, this value cannot be used as a precise measure, but it can still be used to determine whether an asset is undervalued or overvalued.

Deflationary Tokens

The circulating supply of many cryptocurrencies will increase year by year. In this case, the cryptocurrency's diluted market cap would be higher than it currently is, even if the price remains unchanged.

Additionally, deflationary coins are actively reducing their supply. There are many ways to deal with this, one of which is token burning, which will reduce the future maximum supply of a specific asset.  

If the value of assets does not increase year by year, and the supply continues to decrease, then the market value in the next few years will be lower than today.

For example, BurnCoin’s current maximum supply is 20 million tokens with a unit price of $1. However, the team decided to buy back and destroy the tokens from the market, reducing the maximum supply of BurnCoin to 18 million.

After the news of the token destruction was announced, the price of BurnCoin was still $1. Based on future token destruction, the diluted market value of the token is:

18 million BurnCoin x 1 USD = 18 million USD

However, in When the news of token destruction was announced, its market value was:

20 million BurnCoin x 1 USD = 20 million USD

In this case , the diluted market cap is actually lower than the current market cap. Keeping in mind the above example, a lot can happen between the announcement and the actual token destruction.  

Even after being burned, token prices will still rise and fall. For deflationary tokens with frequent token burns, diluted market cap is not an accurate metric at all. Diluted market value is similar to current market value and can only be used as a rough reference to estimate the future value of assets.  

Summary

Cryptocurrency market capitalization is a key indicator to pay attention to, it reflects the entire cryptocurrency industry Increases and decreases in value. It can also be helpful to compare current reported market capitalization with future trends in diluted market capitalization.

At the same time, there are some other metrics that should be considered, after all, market capitalization is only one piece of the puzzle. You must research other aspects of the cryptocurrency industry before making financial investments.