Also called market capitalisation, the term refers to the value of a cryptocurrency (mostly measured in US Dollars). The metric is widely used in both, fundamental and technical analysis and it gives traders a clear sign of the financial value acquired in a certain asset.
Many investors use the value to determine a possible risk-reward ratio, as it can help you to calculate how significant could be the medium or long-term growth of a project. The mathematical technique is calculated as follows:
Cryptocurrency Market Capitalization = Total amount of coins(or total supply) * price per unit.
Based on the amount of investment implicated in a certain project, the market cap is categorized in the following way:
Large-cap: Those type of coins are the safest in the crypto space due to its huge market capitalization. They are recognized as safe investments because there are billions of dollars involved in those projects already. Some of the cryptocurrencies listed in this category are Bitcoin ( $179,1 Billion), Ethereum ($29,7 Billion), EOS ($5,3 Billion), Cardano ($2 Billion), Chainlink ($1,2 Billion) and many more. Currently, there are 18 coins with over a billion in market capitalization.
Mid-cap: Cryptocurrencies under a $1Billion in market cap are included in this category. Mid-cap coins are riskier than large-cap cryptos but are still very reliable and well-known in the market. Projects such as OmiseGo ($318 Million), Huobi Token ($200 Million), 0x ($171,6 Million) and Zilliqa ($141,2 Million) enter in this class of cryptos.
Small cap: These are the riskiest type of assets, with its market cap being less than $10M. Those projects have a considerable percentage of failure and they still need to work a lot on their product, roadmap, marketing, etc. Even though they usually suffer from strong market manipulation (pumps and dumps), they can deliver outstanding rewards if the team succeed in its mission.
A proper understanding of the previous categorization will help you to create a diversified portfolio. Balancing the risk is an important part of the game and investors must know how to limit their losses in this volatile market.
Many investors commit the mistake of having 70% or even 80% of their funds invested in small-caps cryptocurrencies, without taking into account that those are the coins that tend to suffer from strong manipulation and in some cases, fraud. Big market movers (also called whales), usually control the supply and price of those cheap coins, and your portfolio could be severely affected by those movements. Your work as a trader and as an investor is to determine throughout extensive research, which of those mid-cap and small-cap coins could perform better in the years to come.
The market capitalisation of each cryptocurrency is certainly the tip of the iceberg, nonetheless, the total market cap of the whole market should also be taken into account when trading in the short term. Crypto Total Market Cap (TOTAL) and Crypto Total Market Cap excluding BTC (TOTAL 2) must also be in every trader’s watchlist. The first metric refers to the size of the whole market, in other words, how much money has been invested so far in the crypto space, while the second metric refers to the total investment excluding Bitcoin (Altcoins market cap, basically).
In conclusion, every trader should manage the market capitalisation theory completely, however, the metric should not be the centre of the trading strategy, as other key factors are also very important. The tool is very powerful when merged with both, fundamental and technical analysis, but traders should also join this concept with deep research of the company they plan to invest in.