What is meant by Market Cap?
Market Cap is short for the words Market Capitalization.
defined as, “Market capitalization refers to the total
dollar market value of a company’s outstanding shares.”
The term, ‘Outstanding shares’ refer to a company’s stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. Outstanding shares are shown on a company’s balance sheet under the heading “Capital Stock.” The number of outstanding shares is used in calculating key metrics such as a company’s market capitalization, as well as its earnings per share (EPS) and cash flow per share (CFPS).
Market Cap is calculated by multiplying a company’s shares outstanding by the current market price of one share.
i.e. Market Cap = Coin Price x Coin Supply
Basically, in simple terms, Market Cap is nothing but the current investment that a person is making in a particular cryptocurrency.
So, Market Cap can also be defined as, “if you were to add up the price of all of the circulating coins of a Cryptocurrency, you would find the market cap.”
Does the Price even Matter?
Now that you would have an idea about Market Cap, let’s ask the next interesting and important question – Does the Price of the crypto matter?
Well, the clear cut answer is an absolute NO. Here’s why –
People normally want to find out how their investment can be made less but they fail to realize that not all cheap investments are the best investments.
This further poses a huge threat that due to your negligence, you may now be in great danger and go into a huge loss.
The easiest way to explain is to simply show you a picture of a list of the top Cryptocurrencies. Have a look at the screenshot below and notice the red box we’ve used to circle the price of a Crypto named Ripple.
It’s listed as the 4th biggest cryptocurrency on Coinmarketcap.com (the biggest website for checking up-to-date Crypto prices) and yet a single token costs just $0.21 (21 cents).
You might be wondering how this is possible. The answer is simple – Market Cap matters not price.
Now, we’ve included the same picture again below and we want you to look at it and do 2 things:
- Look at all of values under the price column for those top 10 (red column)
- Now look at the values under the column ‘market cap’ (blue column)
Do you notice that the top 10 cryptocurrencies (including Bitcoin) aren’t ordered in terms of price? But they are ordered from the highest market cap to the lowest.
Why does the Market Cap have such a big impact?
To understand this question’s answer, you could consider the following example for simplicity purpose.
First, let’s rearrange the previous formula quickly so that we can understand coin price more easily:
Coin Price = Market Cap / Coin Supply
Now consider a scenario wherein you have a particular crypto coin. The following is noted –
- The crypto coin has $100 million invested into it. This basically means that the crypto coin has a market cap equal to $100 million.
- Let the coin supply also be equal to 100 million.
The coin price will be as shown below –
Coin price = $100 million / 100 million
Therefore, with simple math, the coin price = $1
More Insight –
Now assume the supply to be reduced to around 10 million.
The coin price now will be as shown below –
Coin price = $100 million / 10 million
Therefore, this leads to a coin price of $10
This shows that even with a same amount of money being invested on the coins in both the scenarios, the coins are suddenly changing their worth to about $10, i.e. 10 times the initial value of $1.
This is mainly because of the fact that the token price is affected only by the supply as seen above. But you may wonder what if the Market Cap is changed, then what effect would it have on the crypto coin?
To understand this consider the Market Cap formula and assume the following scenario –
Let’s have a crypto coin that has a supply of 100 billion. If each token costs $1, then how much will have to be invested in it?
Using the Market Cap formula, we get –
Market Cap = Coin Price * Coin Supply
Market Cap = $1 * 1 billion
Therefore leading to a market cap of $1 billion.
In other words, the total investments in the coin would have to be $1 billion for the token price to just be $1. But unless the coin is amazing, there is very little chance of this happening and hence it could be overvalued even if the cost is just about $0.50.
Thus, clearly Market Cap matters more than the Coin Price.