Understanding how to properly evaluate the potential benefits and downsides of any cryptocurrency is very necessary for this day and age when there are so many new cryptocurrencies being introduced to the market.

For this reason, it is essential to have a good grasp of their crypto market caps. The term “market cap,” which is short for “market capitalization,” is an essential component of the trading and investment industries, but it is especially important in the context of newly emerging cryptocurrencies.

Whenever investing in a cryptocurrency project, the first thing that many traders do is check the market capitalization of the coin. Doing this illustrates whether it is the most significant time to buy, sell, or even HODL a particular asset.

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Let’s dive a bit deeper to understand what market is. And the significance of Low Cap, Mid Cap, and High Cap risks in crypto?

What is the market capitalization in crypto?

Market capitalization, or “market cap,” is an aggregate that provides information on the value of a particular asset.

A company’s market capitalization, often known as its market cap, refers to the total dollar worth of all its outstanding shares of stock. In the context of Bitcoin and other cryptocurrencies, market capitalization refers to the total worth of all created coins. The total market capitalization of a cryptocurrency can be calculated by multiplying the current price of a single coin by the total number of coins issued for that cryptocurrency.

Consider using an asset’s market capitalization as an approximate indicator of how stable it is likely to be. This is one approach to consider about the market cap. However, in the same, way that a larger ship is better equipped to safely sail rough seas, a cryptocurrency that has a much greater market value is more inclined to become a more stable investment than one that has a significantly lower market cap.

On the other hand, digital currencies with lower market capitalization are more sensitive to the vagaries of the market, which may result in enormous profits or catastrophic losses.

What is the formula of market capitalization?

The following will explain how to compute market capitalization now that you are familiar with its concept.

The total cryptocurrency market cap = the current circulating supply x current unit price

As indicated in the equation, the market capitalization of an asset may be calculated by multiplying the total quantity that is currently in circulation by the price per token or coin at the moment.

The following is a concise explanation of each component.

• The total quantity of coins that are accessible for trade is referred to as the “circulating supply,”.
• The price at which one unit of an asset may be acquired is what is known as the unit price of that item.

You do not need to input the information by hand; rather, you may potentially save time by utilizing an online market cap calculator.

One of the most well-known is called CoinMarketCap, and it is a website that shows the current market capitalization values of various cryptocurrencies in real-time and is available around the clock.

Why is it Important to Know the Market Cap?

When it comes to identifying the underlying potential and worth of a project, the price alone may be a deceptive signal in the cryptocurrency market. Even Bitcoin, the cryptocurrency with the greatest market capitalization, is susceptible to dramatic price swings due to a variety of variables, including public excitement, rapid shifts in the number of circulating coins, and even outright prohibition of cryptocurrencies in some nations. The overall image of a cryptocurrency’s ultimate potential may often be altered because of occurrences such as these.

Coins or tokens that are in relatively little circulation but have a significant market value are exactly what astute cryptocurrency investors are looking for. Having said that, cryptocurrency investors use market capitalization as a primary metric to assess the relative worth of various cryptocurrencies and forecast their future development. In general, investors are often more ready to pay for assets if they have a large market capitalization.

For instance, when crypto fans talk about the overall supply of a cryptocurrency, they may occasionally use the phrase completely diluted supply. This is because a fully diluted supply is a more accurate description of the situation (FDV).

The total worth of all of a cryptocurrency’s coins, not only the ones that are currently in circulation, is included in the calculation used to determine the “fully diluted market cap.” One of the reasons why Bitcoin (BTC) is still doing so well is because there are only 21 million coins available after they are all diluted. As of right now, there are still over 2 million of these bitcoins that may be mined, even though the total amount of Bitcoins in circulation is over 18 million.

Because of this, Bitcoin (BTC) is one of the assets that has performed the best as a result of its scarcity and its usefulness. It is essential while debating the supply of a token, to distinguish between those who use FDV as their standard and those who use circulating supply as their standard. When making financial selections, it is possible to have a better understanding of the whole picture by taking market capitalization into consideration.

What exactly do the terms “Low Cap,” “Mid Cap,” and “High Cap” mean?

The market capitalization of cryptocurrencies may be broken down into the following three categories:

High Cap – Over $10 Billion

Bitcoin and Ethereum are examples of high-cap cryptocurrencies, each of which has a market valuation that is more than $10 billion.

Due to the fact that they have a proven track record of development and, in many cases, more liquidity, investors perceive them to be investments with a lower level of risk.

This indicates that they are able to tolerate a bigger amount of consumers cashing out without the price being significantly influenced in any way.

Mid Cap – $1 Billion – $10 Billion

Mid-cap cryptocurrencies are those that have a market capitalization that ranges from one billion dollars to ten billion dollars; these cryptocurrencies are often seen as having more unrealized potential gain but also higher risk.

Small Cap – < $1 Billion

Small-cap cryptocurrencies are those that have a market capitalization of one billion dollars or less and are the ones that are most prone to big price fluctuations dependent on how the market feels.

The market capitalization of a cryptocurrency is a useful metric for comparing the total value of different cryptocurrencies; however, market trends, the stability of a cryptocurrency, and your own financial situation are all important factors to consider when evaluating the risks associated with any investment.

What are Low Cap, Mid Cap, and High Cap Risks in Crypto?

The absence of exchanges on which they are traded, a lack of liquidity, and the overall possibility of their being taken out of rotation are the primary dangers associated with low caps (and even with many mid-caps).

Low caps, or anything that is not in the top 50 by circulating market cap, are very volatile and may disappear at any time. These projects seldom survive; they often are unable to develop goods, and the majority of them perish in a drawn-out manner on exchanges because their founders and early investors dump them to zero, so eliminating any liquidity that may have been present.

Low caps are reserved for moonshots and gambling outside of huge bull runs.

Mid-caps, or the top 10 to 50 cryptocurrencies by market cap, are a mixture of coins that can remain in circulation and expand over time, as well as coins that are excellent ways to lose money. You need to do your homework before investing in a mid-cap, but there are times when they may be profitable investments. Over the course of time, plenty of mid-caps have long passed.

A high cap, such as a coin that ranks in the top 10 or so by market cap, is almost certainly going to be a stable project that has already shown its worth over the course of time. In most cases, it has the level of liquidity required to attract some players with average size stakes. You can place a market order, and there is a good chance that you won’t experience slippage. It is quite unlikely, but not unheard of, to throw away everything on a big cap.

After that, there is Bitcoin. Bitcoin is the most valuable large-cap asset right now. It is the crypto asset with the lowest risk, except for stable currencies.

But even Bitcoin carries some degree of danger.

Therefore, if you are in the midst of a bear market and you want to take a moonshot on keeping a low cap, or if you are a day trader and you want to ride a low cap for a minute, then it is OK for you to take that risk. However, even for the typical investor, investing in mid-cap stocks is a dangerous proposition. Focusing on big capitalization, and more specifically Bitcoin is the best strategy for investors who desire exposure to the cryptocurrency market while taking on as little risk as possible.

If the value of cryptocurrencies continues to rise over time, investors that hold a significant proportion of their holdings in Bitcoin while also holding smaller positions in other cryptocurrencies, such as Ethereum, XRP, and so on, have a good chance of seeing positive returns. Even if we have another incredible bull run in the future, an investor who is heavily weighted in low and mid-caps runs the risk of either doing extremely well or simply seeing their money shrivel away to nothing.

To put it another way, the constant turnover of low caps and the rapidity with which they appear and go make them an unattractive investing option in general and a significant catch for newbies.

Final Thoughts

It is essential, not only for individual cryptocurrency investors but also for investors in other assets, to have a solid grasp of the concept of market capitalization. The market capitalization of a company is useful information that may help investors better understand where they are putting their money.

So, this makes it essential to have a solid understanding of what the crypto market cap is and how having this knowledge may assist you in estimating risk while investing in cryptocurrencies, especially considering how volatile the market currently is.