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Is crypto market cap important?

Investor Highlights

  • Market cap is important for comparing the relative size of cryptocurrencies, evaluating the performance of a specific coin, measuring potential growth, and as a measure of risk.
  • Cryptocurrencies are classified by their market cap as large-cap, mid-cap, and small-cap.
  • However, it can be misleading as it does not provide a complete picture of the cryptocurrency.
  • Market cap can be artificially boosted by hype, price manipulation, supply manipulation, fake trading volume, and fake recommendations and misinformation.

As this article was being finalized for publication, the global crypto market capitalization was just shy of $1 trillion dollars, $994 billion to be exact.

That's a big number... and an exciting number, but why is the crypto market cap more than meets the eye?

What is a crypto market cap?

Crypto market capitalization — or "market cap" — represents the overall value of a specific cryptoasset in circulation, computed by multiplying the total number of coins by the current market price of a single coin.

The global cryptocurrency market also has a market cap, which is the combined market cap of all crytocurrencies.  

The relevance of the crypto market cap is still debated, with some arguing it can lead to less-informed decisions, as it is dissimilar to its stock market counterpart. However, market cap is essential to understand when making crypto investment decisions.

Why is crypto market cap important?

Crypto market cap is important for five reasons:

  1. Comparison: Market cap serves as a metric for comparing the relative size of various cryptocurrencies, with a higher market capitalization generally indicating wider adoption and a larger user base.
  2. Health & Growth: Market cap is as an indicator of the overall health and growth of the cryptocurrency and market, with an increase in market capitalization potentially signaling rising investor interest and adoption.
  3. Potential: Market cap can be a measure of a cryptocurrency's potential for future growth, as a higher market capitalization generally indicates a greater level of investment, thereby potentially indicating an increased potential for growth.
  4. A Measure of Risk: Market capitalization can also be utilized as a measure of risk, as a higher market capitalization generally suggests a more established investment and, thus, a lower level of risk.
  5. Coin & Market Performance: Market capitalization can also be used to evaluate the performance of a specific coin in relation to others, thereby facilitating the identification of trends and potential investment opportunities.

How can a crypto market cap be misleading?

While market capitalization is a commonly used metric, it should be considered in conjunction with other factors as it does not provide a complete picture of the cryptocurrency.

Crypto market caps can confuse new investors, who might think it means that an equal amount of funds has been invested into the coin. But this isn't necessarily true; let's say a coin has a market cap of $100 million, but only $5 million has been invested. If the coin collapses, its market cap will go from $100 million to zero, but investors have actually lost only $55 million.

How can a cryptocurrency artificially boost its market cap?

Artificial inflation of market capitalizations for coins and projects can be used to manipulate the cryptocurrency ecosystem.

The five most common practices are:

  1. Hype: Some project owners use bots, fake accounts, celebrities, and “FOMO” to generate buzz on social media, which can attract investors and lead to an increase in price and market capitalization.
  2. Price Manipulation: Market participants may use "pump-and-dump" schemes to artificially boost the price of a coin. In these schemes, a high volume of buy orders is sent to create the impression of interest in a project/coin, leading to a real increase in price and market capitalization.
  3. Supply Manipulation: Token owners can influence the market capitalization of their projects by manipulating the circulating supply. This can be achieved through frequent token emissions, releasing a large initial issue, or airdropping coins into user wallets.
  4. Fake Trading Volume: Some token owners send fake volume to exchanges to make their projects appear more attractive to investors. Higher volume indicates greater interest in a project and more liquidity, which can lead to an increase in market capitalization.
  5. Fake Recommendations & Misinformation: Some projects pay review sites for positive reviews and recommendations. Additionally, false information may be disseminated during "pumping" phases to attract more investors and increase market capitalization.

It is important to note that these practices are unethical and may be illegal. Investors should conduct thorough research and due diligence before investing in any cryptocurrency or digital asset project.

How are cryptocurrencies are classified by their market cap?

  • Large-cap cryptocurrencies, like Bitcoin (BTC) and Ethereum (ETH), which have a market capitalization of over $10 billion, are considered lower-risk investments due to their established history of growth and higher liquidity, allowing for a greater volume of trading activity without significant price fluctuation.
  • Mid-cap cryptocurrencies, with market capitalizations between $1 billion and $10 billion, are perceived as having a higher potential for growth, yet also carry a higher level of risk, as compared to large-cap cryptocurrencies.
  • Small-cap cryptocurrencies, which have market capitalizations below $1 billion, are most susceptible to significant price fluctuations due to market sentiment, and, therefore, may carry a higher degree of risk for investors.

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