Introduction to cryptocurrency market capitalization
Cryptocurrency market capitalization is a mathematical method for determining the value of a cryptocurrency.
While some people think that price is value, reality says the opposite.
For example, the taste of a ham sandwich will not get better when you spend $ 30 instead of $ 10. In fact, value added without added value does not bode well.
Prices jump for various reasons. Favorable or unfavorable news events cause sharp price fluctuations.
Government action also plays a role. And exchanges often have a strong impact on prices.
Investor psychology also has a place to be in short-term price fluctuations. Bitcoin has gone up thanks to the so-called Thanksgiving effect in 2017.
Imagine that people go home in a festive mood, enjoy good food, feel fine, talk with their friends and relatives, discuss their investments, and then invest their own money in a positive way in a new cryptocurrency.
Bitcoin gained popularity (and price) before this holiday, which influenced its continued success in the end.
Meanwhile, you need to focus on cryptocurrency market capitalization.
Definition of cryptocurrency market capitalization
Stock market analysts use the market capitalization of companies to make informed investment decisions.
Market capitalization simply determines the current stock price multiplied by the total number of existing stocks.
In the world of cryptocurrencies, this term means that the current value of a crypto coin is multiplied by the total number of coins available on the market (also known as a circulating offer).
Market capitalization of the company \u003d total number of shares * current rate.
Cryptocurrency market capitalization \u003d total number of crypto coins * current price.
What does all this mean
Usually this information indicates the amount of investment risk. In a broad sense, stocks are classified by market capitalization: small, medium and large.
Large companies such as Apple, Amazon, Walmart or Home Depot pose less risk to the investor. But reaching a certain size limits the company’s growth potential.
Small-cap companies present more investment risks due to potential failure. But if successful, they bring huge income to early investors.
You can use the market capitalization of a company or cryptocurrency to assess its chances of growth / failure.
For example, take all the companies in a specific sector (technology, retail, manufacturing) and calculate the market capitalization of each company.
Then add up all the results and you will get the market capitalization of the entire sector of the economy.
The same thing can be done with a group of cryptocurrencies. For example, take anonymous coins, calculate the market capitalization of each, and then add the results.
This number will indicate the volume of market capitalization of cryptocurrencies in the field of ensuring data confidentiality.
Bitcoin Size vs. Altcoin Risk
Bitcoin has the largest capitalization among cryptocurrencies. The total number of coins in circulation is 17,000,000 units, and the cost of one coin is approximately $ 8,000.00 at the time of writing.
Bitcoin’s market capitalization is approximately 17,000,000 * $ 8,000.00 \u003d $ 136,000,000,000.
The remaining most popular cryptocurrencies, whose ratings range around 100 points, have a capitalization of approximately $ 55,000,000 each.
Although one of these coins can be sold at a lower price than Bitcoin, you get less value. However, these cryptocurrencies also potentially have more room for growth.
Your task is to determine which of the coins with lower market capitalization can bring as much value to the world as Bitcoin.
Another important aspect in the issue of cryptocurrency market capitalization is market manipulation.
Cryptocurrencies with small capitalization lend themselves more to market manipulation than cryptocurrencies with large capitalization.
Let’s just say that dangerous figures often exploit coins with a small capitalization, controlling the total number of their coins in order to cause strong price fluctuations in one direction or another.
In the early, dark times of the stock market, operators turned this practice into real art, as described in Edwin Lefebvre’s book, Memoirs of a Stock Market Speaker, first published in 1923.
What is this talking about
Cryptocurrency market capitalization does not provide any information regarding the direction the cryptocurrency will take.
The large market capitalization of Bitcoin does not give him immunity from lower prices.
No part of the formula determines the future number of circulating coins. On the contrary, the price code determines whether the system will issue new coins, and if so, at what speed.
While some cryptocurrencies limit the total number of coins, others create an endless supply of coins.
The Bitcoin network limits the total number of bitcoins to 21 million units.
As for Ethereum, Vitalik Buterin is positive about the system in which existing coins are burned from the existing supply in order to avoid inflation.
However, do not overestimate the fixed supply of coins. Although inflation reduces the value of a currency, a deficit does not necessarily equate to value.
Not all rare books are sold at a high price.
A limited quantity guarantees one thing: all fluctuations in market capitalization come from the price, since the total number of available coins remains fixed.
Market capitalization in itself does not determine anything about the speed or direction of a cryptocurrency coin, whether its rapid growth or gradual decline.
But still, the calculation of market capitalization for a certain period of time can reveal trends.
For cryptocurrencies, the number of dead coins is a unique factor that also affects market capitalization.
Some people lose their wallets. And some users lose the passphrase to restore the wallet that crashed.
Errors in the code also lead to the loss of coins. Hackers steal crypto, but often can not withdraw these coins.
Thus, a more accurate cryptocurrency market capitalization formula matters:
Cryptocurrency market capitalization \u003d (total number of coins in circulation minus dead coins) multiplied by the current price.
Unfortunately, there is no good way to determine the exact number of dead coins.
The approach to market capitalization refers to the fundamental area of stock market investment analysis.
Fundamental analysis aims to calculate the value of the company to determine future earnings.
This strategy involves thinking in long-term categories, and its implementation implies an increase in value over time.
Technical analysis, on the other hand, focuses on short-term trends, and price fluctuations play a more important role than long-term valuation.
If an investor using technical analysis believes that the price of a stock or cryptocurrency will rise rapidly over the next week, this will be a good short-term investment, regardless of market capitalization.
Next year, the cost may drop to zero, but for a short-term investor it does not matter.
There are several ways to determine value.
Restrictions on the use of traditional stock market analysis, such as market capitalization, arise when you realize that these methods are needed to analyze companies.
Bitcoin does not exist as a company, but as a software system for conducting financial transactions in a decentralized space.
Similarly, Ethereum provides developers with a platform for creating decentralized applications and organizations.
Ethereum helps create companies, but its own mission does not involve making a profit and increasing its own revenues.
When people invest in Bitcoin, they largely rely on their vision of the future of this cryptocurrency.
They believe that the world will switch to cryptocurrency settlements, and Bitcoin seems to have the highest chances of becoming the most important cryptocurrency. But no one knows for sure.
Fiat Currency Trading
While cryptocurrency stock market analysis shows limitations, there are analysis methods used in fiat trading.
Will they be useful if applied on cryptocurrency? Unfortunately, just as stock analysis is directed to company data, analysis for fiat currency trading is directed to countries.
Countries have their own fiat currency. A country’s ability to enter into trade agreements, solve employment problems, and finance military operations affects the analysis of fiat currency.
Thus, the methods of trading in national currencies are largely not related to cryptocurrency trading.
There are many tools to inform investors.
Cryptocurrency market capitalization is one of these tools, which makes it possible to see the long-term prospect of cryptocurrency, since prices fluctuate only in the short term.
Prices for the entire cryptocurrency market are either rising or falling, but the dominant market capitalization of Bitcoin suggests that it remains the most valuable cryptocurrency.