Market Cap: The Secret Sauce

It is easy yet misleading to be attracted to the price of a crypto asset. A 20c coin may appear ‘cheap’ and undervalued, while a $5,000 coin may feel expensive and out of reach. It is how we are programmed to perceive value in the real world and is also a widespread misconception when assessing cryptocurrencies!

Let’s look at why price doesn’t paint a complete picture of value and why the focus needs to be on market capitalization (market cap) to find the total value of an asset.

If you are familiar with the traditional stock market cap, you would know that it is the company’s share price multiplied by the number of shares outstanding. For example, a company with 1 million shares valued at $5 would have a market cap of $5 million. Crypto market cap is very similar, it is the number of coins/tokens in circulation multiplied by the price per coin/token.

This is one super important metric with cryptocurrency as it is how we rank cryptocurrencies by their relative value. Understanding the market cap will also allow you to determine the potential upside and how much asset capital needs to be added to grow your money to the desired amount.

It is important to note that circulating supply is used for this equation rather than total supply. Circulating supply represents the number held on the market, whereas total supply includes tokens/coins that are unreleased.

The above points out that price alone doesn’t mean XRP is “cheap” or that YFi is “expensive”. Comparatively, a solid investment opportunity can’t solely be based on a lower coin or token price.

By comparing market caps, investors can better understand the current popularity and confidence around the coin and therefore the potential upside.

Market cap is used as an indication of the level of risk associated with that asset. Larger cap coins are seen as ‘less risky’ but slower-moving compared to smaller market cap coins which can come with more risk but move faster. When looking to build a portfolio as an investor, a useful approach can be to hold a diversified spread of small, mid and large cryptocurrency market caps.

The level of portfolio diversification is different for all investors. It is encouraged to do your own research before investing in any asset, understand your risk tolerance and make sure it aligns with your overall investment strategy.

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