What is the market cap? Market cap or market capitalization is the total cost of all the shares of a company’s stock. Very simply, if we multiply the total number of shares by the price of the share, we can find out the market value of the company. When it comes to crypto, it is commonly felt that the market cap of crypto is the amount of money invested in that particular coin. However, this is not entirely true. This is a misconception. Just consider this, when Bitcoin reached 250 billion dollars in market cap, did it mean that there were 250 billion dollars invested in it? No, of course not. When market cap increases, the price of the crypto also increases. One has to understand that there is no new money coming in for the coins; only the price is rising.
Just like buying penny stocks in a stocks market, buying cheap crypto coins is a trend. Terms like stock price and market cap do not make them similar. You must understand that these two are totally different. Many people get confused and are not able to understand the correct relation between the market cap, supply, and, price. People make the mistake of ignoring the market capitalization and supply and giving more importance to the price of the crypto. However, it should be the other way around because these two factors determine the true value of any cryptocurrency. Let us see how market capitalization and supply help in finding the true value of cryptocurrency.
How you find the value is by using the following formula:
Market Capitalization = current coin price * coin supply
For example, if there are 20 million coins and the current price is 5000 dollars, then the market cap will be the product of these two numbers. Similarly, we can also find the cost of the coin by using the following formula:
Coin price = market cap/coin supply
This can be defined in two ways. One is the total supply, and the other is the circulating supply. The overall supply includes the circulating coins plus the number of coins that are held in reserve or yet to be mined. Circulating coins, on the other hand, are the coins which are actively being traded in the market. For example, a crypto coin may have a total supply of 25 million coins but a circulating supply of only 19 million coins. Coins with lower supply are known to have a higher price when compared with those whose supply is high. There are cases where a coin with a high supply has more market value than a coin with a low supply.
Factors Which Affect the Value of Cryptocurrencies
There are a number of factors that can affect the value of Cryptocurrencies, of course, public opinion is a huge indicator of price. Crypto Head explains that the three main technical factors that affect the value of Cryptocurrencies are:
- Demand and Supply
Demand and supply can play out in two different ways. Sometimes the low supply can trigger higher demands, and at other times a high supply of crypto can result in higher values. If the demand gets higher, the price also gets higher in this case, even if the supply also increases. There are instances where a low supply can bring the price down as people may lose interest.
- Future Prices
It is almost impossible to guess future prices when it comes to virtual assets like cryptocurrencies. If you look at the trading index and decide for the future, it could backfire. Most people buy the top coins, which in turn influences a crypto’s market cap. Judging a coin’s worth based on this information can prove to be a bad decision.
- Dead Coins
If you have coins in a wallet and you lose the password or the key, then it is almost as good as gone. You won’t be able to get your hands on the coins ever. When hackers steal cryptos, it is possible at times that they are not able to redeem them. This also makes them useless. These kinds of coins are called dead coins. These can have an impact on market capitalization and the price of the crypto coin.
If you are planning to invest, don’t just look at the price of a crypto coin. It may be misleading. Take the full picture in and look at the various factors before deciding. While market capitalization is a good indicator to guess the true value of a cryptocurrency, you should keep in mind the other important factors as well. Similarly, supply cannot be the main factor when it comes to choosing a coin to invest in. There are many factors that can influence and also fluctuate the price of a crypto coin. Research is very important and so is collecting all the information that you can. Ask as many questions and talk to people related to this field before you make your choice. Always weigh market cap with other factors before making your investment decision.