Crypto market capitalization
Let's say a company issues 1,000 shares and one such share has a value of $100. In order to find out how much the whole company is worth by the stock exchange measures, the number of these shares must be multiplied by the price of one. Thus, the price of the company and hence its capitalization is $100,000. Capitalization is commonly referred to as the aggregate market value of assets in circulation of something (capitalization of an individual company, industry, market of any goods or services as a whole). Everything is pretty clear but what about market cap as a whole, what are its features and what significance does it have?
The mechanism of crypto cap differs in comparison with the calculation of this parameter in the stock market. It takes the total number of generated crypto currency into account, not its turnover on exchanges, as is done with securities. However, other than that it is basically the same. The question of capitalization is very important indeed because how do you deal with crypto currencies, which initially do not have a physical form and do not belong to any country, who is backing them, and if not, why buy them? This is the main question that leads us crypto market capitalization.
In simple terms, crypto market cap is the total value of all virtual currency in circulation. This indicator can indicate both the high cost of one coin and just a large number of coins in free circulation. The growing capitalization of the market is an important indicator for potential investors. It shows that this market is developing and digital money is becoming an increasingly more popular means of payment.
However, crypto currencies market cap is not the only parameter which you should pay attention to. The volume of trading for a certain period of time is no less important. Growing interest in virtual money can be proof of the fact that they really pay off and they might be worth more with each subsequent day. The vast majority of crypto currencies, with the exception of some proprietary ones, are not backed by anything except for their holders' belief that these tools are useful and in demand; but most importantly that they will remain so in the future, constantly expanding their scope of application and increasing value. Nothing can be a better measure of demand for and reliability of a crypto currency than voting with money, i.e. the more this currency is bought, the more it is needed.
A simple example: there are two currencies - EOS from the TOP-20 crypto cap of $495 million and a rate of $3 for a coin and digital money Nexus standing at about the 50th position at $69 million and a rate of $1.3 per coin. Which one is more attractive for an investor? At first glance, it is obvious - EOS has the advantage. But if you follow the weekly dynamics of money turnover, then it takes a completely different turn. In the span of seven days EOS reduces 25% of the turnover, while the Nexus turnover, on the contrary, has been steadily growing by approximately 40%. And this information gives investors the opportunity to determine the prospects of a currency as a tool for investment more accurately.
Since capitalization is tied to the exchange rate, the overall market demand has significant influence on it. In turn, the demand is influenced by the following factors:
- Behavior of large traders on stock exchanges;
- New developments in the field of crypto currency;
- Opinions of famous people, forecasts of experts and financiers;
- Laws regulating its status;
- Other important news related to the world of crypto currency.
At the moment, there are already hundreds and thousands of different digital tokens based on different mathematical algorithms and the total crypto capitalization has reached and surpassed 500 billion US dollars, even though a year ago it was only 50 billion. The crypto currency cap is a variable and varies depending on the situation on the market and different events related to each specific crypto currency and blockchain technology as a whole. It is likely that when you read this article, the values of capitalization indicators are already very different from those that were indicated at the time of writing.
The main difficulty in estimating the value of digital money is the impossibility of calculating their real value. After all, they are not tied to raw materials, precious metals or typical currencies. Another point is inability to determine the ratio of working crypto and long lost ones. After all, virtual money can disappear along with burnt hard drives, be block in accounts due to lost passwords or dissolve after clouds, which store them, collapse. This makes the question of the crypto cap quite controversial.
We know what the crypto capitalization is but what is its practical use for trading and how do we use this information correctly? Do not confuse capitalization with value - these are different concepts, although they have a direct relationship: a drop in capitalization leads to a decrease in quotations and their growth - to an increase in capitalization. This is because the price of crypto currency is mostly based on belief, seeing that cap is growing, investors understand that demand is increasing and exceeds supply. Someone invests considerable money, accordingly the tool has a future and its price will rise so it is also advisable to buy it as soon as possible, which will increase demand further.
Small speculators and trading robots instantly disperse this process creating a snowball effect until there is an important event of the opposite direction or until large players begin to fix their profits. Then, you might expect a correction or even a trend change. Another serious difference between crypto and traditional securities, for example, is the impossibility to determine the real capitalization accurately. This is because it is impossible to determine how much of the crypto currency is actually available to investors and what amount is stuck in the accounts as a result of loss of passwords or erroneous transfer to incorrect accounts (and it is impossible to recover the password or cancel the payment). Damage to the hard disk can also lead to the loss of bitcoins if they were not stored online but in the software wallet installed on the computer.
Although the maximum and current amount of each type of crypto currency is precisely known, it is impossible to understand how many of the already generated tokens can actually be included in the turnover. According to approximate estimates, up to 4 million bitcoins could be lost so it is impossible to consider the market cap indicator as 100% accurate. However, this indicator is still a common reference point reflecting the level of popularity and development of the crypto currency. That is why, before opening a trade, it is useful to view not only news on the topic but also a graph showing the changes in capitalization.