Calculating the cryptocurrency market capitalization is relatively straightforward. Most traders are keen to compare the market capitalization of individual projects, but market capitalization can also be used to see the big picture.
The total value of all crypto assets is much higher than Bitcoin or Ethereum, even though the two major projects top the list by market capitalization.
All major cryptocurrency data aggregators report total cryptocurrency market capitalization, so this metric is almost at your fingertips. But what does this metric mean? What market information can be disclosed?
What is Cryptocurrency Market Capitalization?
The current market value of a cryptocurrency network, often referred to simply as “market cap,” is calculated by multiplying the circulating supply of a cryptocurrency asset by the unit price.
Suppose there are two networks, AliceCoin and BobCoin. The total supply of AliceCoin is 1,000 coins and they are all in circulation. BobCoin is a proof-of-work chain with a capped supply of 100,000 coins, of which 60,000 are in circulation. The current market price of AliceCoin is $100, while BobCoin is $2. So, which coin has a higher market cap?
Market Cap = Circulating Supply × Price
Market cap of AliceCoin = 1,000 × $100 = $100,000
BobCoin’s market cap = 60,000 × $2 = $120,000
Even though the unit price of BobCoin is 50 times cheaper than AliceCoin, the value of the BobCoin network is still higher than that of AliceCoin. This is why market cap is a better assessment of network value than token unit price.
What is the Total Cryptocurrency Market Capitalization?
The total market capitalization is the sum of the value of Bitcoin, altcoins, stablecoins, tokens, and all other cryptoassets in the market. Many believe this metric is important because it gives a complete picture of the size of the industry.
Due to the relatively high volatility of the cryptocurrency market, values tend to ebb and flow. In the six-and-a-half years since the introduction of cryptocurrencies, the total market capitalization has never crossed the $20 billion mark. Since peaking at $770 billion in 2018, the market cap has fluctuated around $100 billion.
Why Does the Total Cryptocurrency Market Capitalization Matter?
The combined market capitalization of cryptocurrencies is often used as a benchmark against other sectors in the macroeconomy.
For example, many analysts often compare the total cryptocurrency market capitalization to the market capitalization of precious metals or stocks, as this provides a rough estimate of how the entire cryptocurrency market will develop over the next few years and even decades.
However, no one knows what the best way to value cryptocurrency and blockchain projects is. These comparisons, while useful, should not be trusted blindly.
Comparing different financial markets side by side is often fruitless. Because different industries attract different types of investors.
Stock traders, foreign exchange or precious metals speculators will not actively turn their attention to cryptocurrencies. Cryptocurrencies are a booming emerging asset class that will attract like-minded investors.
Why is the Total Cryptocurrency Market Capitalization Misleading?
Referencing the total market capitalization of cryptocurrencies to make investment decisions can be misleading for a number of reasons.
The first thing to do is to ensure that the market valuation of each item is accurate, calculated by multiplying the supply by the price of each asset.
However, accurate supply information is difficult to determine. If this data is inaccurate, subsequent calculations will naturally be untenable.
Second, the market value of some projects can be manipulated. They do this to create false security and exaggerate value. If you only focus on the total market capitalization without delving into its actual meaning, it may lead to mistakes in investment decisions.
At the end of the day, total market capitalization is just a value for a specific time period. This value may be hundreds of millions today, a billion next week, and only tens of millions in 6 months. It reflects only a momentary state of the cryptocurrency industry.