Nicholas likes to include elements of poetry in his work. He believes that only the most beautiful prose can do justice to the remarkable feats of sporting greatness we’re occasionally fortunate enough to witness. Thus, whenever a world record is broken in athletics or a sports team achieves something unprecedented, Nicholas shuts himself off from the world, only emerging once he has created a masterpiece worthy of the event. It’s a massive pain with regard to deadlines, but you can’t knock the quality of the work!
Importance of Market Cap
Last updated Nov 16, 2023 | 11:22 AM UTC
By Nicholas W.
If you follow crypto news, you probably heard about Bitcoin’s market cap reaching $1 trillion in early 2021, or when the total crypto market cap reached $1 trillion.
But what is market cap, and why is it important for cryptocurrencies?
What Is Market Cap?
Market capitalization, or market cap, is the total worth of all coins of a given cryptocurrency, or the total worth of all shares of a company. The math is the price per coin multiplied by the number of circulating coins.
If the price of 1 Bitcoin is $60,000, and there are 19 million coins in circulation, its market cap would be $1.14 trillion.
Bitcoin has a total supply of 21 million coins, but only 19 million are in circulation. The remaining 2 million have yet to be mined, with the last Bitcoin estimated to be mined in 2140.
Ethereum has a circulating supply of 118 million Ether with a 2021 price per coin of ~$4,500 and a market cap of $530 billion.
In Fall 2021, Bitcoin had the largest market cap of all cryptocurrencies at $1.2 trillion. Bitcoin is larger than almost all companies trading on the stock market, with exceptions of Apple, Microsoft, Amazon, Alphabet, Tesla, and Aramco.
Since its inception, Bitcoin has been the dominant crypto, with over 50% of the total crypto market cap in Bitcoin until recently, as you can see in the figure below.
Some observers foretell “The Flippening,” when Ethereum will surpass Bitcoin’s market cap, becoming the most prominent crypto in the world.
As of this writing, Ethereum is $600 billion behind Bitcoin, but crypto is very volatile, and you never know what will happen in one year, let alone ten years!
Apple, the largest company in the S&P 500, is only ~6% of the S&P 500, while Bitcoin has a massive percentage of the total crypto market cap (42% as of this writing). Apple would need a market cap of $15-25 trillion to be as dominant as Bitcoin.
Whenever something bad happens, and Bitcoin’s price falls, most other cryptocurrencies will fall too.
In 2021, when China forced a mass exodus of all Bitcoin miners, BTC’s price plummeted along with all other cryptos, even though Bitcoin mining doesn’t directly affect any other crypto. As the miners relocated to other countries, Bitcoin’s hashrate and price steadily recovered.
As the cryptocurrency market has matured and other coins increased in value, Bitcoin’s overall dominance has decreased. However, it's still the major coin and the first to have a futures ETF in the United States.
Why Is Market Cap Important?
Market cap is the true worth of a coin and is very relevant in today’s market. For example, the 2021 price of SHIB per coin is a mere fraction of a cent between $0.00002 and $0.00008, but its market cap peaked at $40 billion, cracking the top 10 of all cryptocurrencies! Not a cheap coin at all!
Similar psychology was at play with Dogecoin during its retail investor-fueled 2021 rise to the top 10, with its price per coin oscillating between $0.20 and $0.74.
Stocks don’t have much variability in the number of outstanding shares, so there aren’t any stocks worth $30,000 or $0.0001 per share like in crypto.
Cryptocurrency developers can arbitrarily choose the number of coins in circulation; not as simple with stocks. The same “cheap” price in traditional investing is likely not “cheap” in crypto.
There is shameless ‘shilling,’ or promotion, of all coins constantly on social media. You may hear “SHIB to $0.1” or “BTC to $1 million” and think that’s possible or will happen soon.
SHIB to $0.1 per coin, with a circulating supply of 550 trillion coins, would require a $55 trillion market cap.
BTC to $1 million would require a $19 trillion market cap.
When you hear price targets like these, do the math with their market cap to see if it's even feasible (in the case of SHIB, certainly impossible). Don’t fall for these marketing stunts.
Of course, buying $100 USD worth of a coin and receiving thousands or hundreds of thousands of that coin is more fun than buying a small fraction of a single Bitcoin.
When considering investing in a coin, the importance of market cap cannot be underestimated.
As with all investing, do your research and only invest what you can afford to lose.
Written by