Published on September 9th, 2019 | by Sunit Nandi0
A Trader’s Guide to Cryptocurrency Market Caps
Gone are the days when financial assets are limited to traditional securities. In this digital era, an investor is provided with a more extensive range of options other than the conventional stocks, such as capitalizing in cryptocurrency.
Accordingly, if you are actively engaging in this trade, you’re probably already aware that the price should not be the only indicator to consider in determining the value of cryptocurrencies. There are several measures available that can help you develop a better understanding of a virtual coin’s monetary worth.
A particular example is market capitalization. Called market cap for short, this metric is considered the best when it comes to comparing the value of coins. It also helps with identifying the sizes of cryptocurrencies and their present ranking.
Below, we provided the fundamentals of market caps and how they can serve as a crypto trader’s guide in choosing wiser investments. But, before that, let’s have a quick review of how market cap generally works.
How are Market Caps Calculated?
As stated, market caps provide an effective way to measure crypto’s relative size. If you visit a pricing platform, you’ll see how cryptocurrencies are ranked based on their market cap. But how exactly are market caps calculated?
Crypto market cap is the product you get after multiplying an altcoin’s price with its circulating supply. Here’s an example: Noah Coin is a token issued on Ethereum, and it’s currently priced at $0.00014640 with a circulating supply of 73.8 billion. If you follow the formula, the market cap will amount to over $10 million.
Why Does it Matter?
So, how can knowing market caps guide you in choosing investments? This metric actually gives you an idea of the risks you’ll deal with when you invest in a cryptocurrency, as well as its potential growth. To understand this more clearly, you need to know first the classification of the cryptos you’re eyeing.
Large-Cap: Investing in large-cap cryptos is often considered a safe move due to their low volatility. However, the downside is they aren’t likely to experience high growth.
Mid-Cap: Cryptos in this class have a lower market cap than large-cap ones; thus, their growth potential is a lot higher. They are also a riskier choice because they are still susceptible to market shifts and manipulation of larger investors or whales.
Small-Cap: These cryptos are easily affected by whims in the market and can instantly pummel to nothing when circumstances allow. Holders of small-cap tokens also have a higher risk of being crushed by big-time traders.
As explained previously, cryptos have three broad classifications. Each has its own edges and drawbacks.
In addition, it’s vital to note that classes aren’t likely to experience growth simultaneously. For instance, your large-cap cryptos may depreciate while your mid-cap cryptos are appreciating. Therefore, the best way to maximize your investments’ potential is to develop a diversified portfolio that efficiently combines all three classes.
Having a diversified portfolio enables you to reduce risk by achieving balance. You can also benefit from the distinct advantages of all three since you’ll gain ownership of assets in each class. Still, do remember that although diversification can lower risks, they won’t be eliminated entirely.
Market cap is indeed a good measure of a crypto’s actual monetary value. However, keep in mind that it’s not ideal to only consider one metric when you’re planning to invest. There are multiple factors to take into account and other reliable tools to utilize, aside from market caps.
Conduct extensive research on projects that have caught your attention and consult other traders to know more about their prospective growth.