There is a lot of terminology related to Cryptocurrencies. It can all get a little confusing at times and people regularly misuse the terms of ‘Market Cap’ and ‘Price’.
In Layman's terms:
- Market Cap is the amount of Fiat money (USD, GBP etc) currently invested into a Cryptocurrency
- The price of a Cryptocurrency is the amount that it costs to buy a single coin/token of the currency (or less depending on the open market orders).
Definition of "Market Capitalization" and how it is calculated
Market Capitalization is one way to rank the relative size of a cryptocurrency. It's calculated by multiplying the Price by the Circulating Supply.
Market Cap = Price X Circulating Supply.
The difference between "Circulating Supply", "Total Supply", and "Max Supply"
Circulating Supply is the best approximation of the number of coins that are circulating in the market and in the general public's hands.
Total Supply is the total amount of coins in existence right now (minus any coins that have been verifiable burned).
Max Supply is the best approximation of the maximum amount of coins that will ever exist in the lifetime of the cryptocurrency.
Why the Circulating Supply is used in determining the market capitalization instead of Total Supply
We've found that Circulating Supply is a much better metric for determining the market capitalization. Coins that are locked, reserved, or not able to be sold on the public market are coins that can't affect the price and thus should not be allowed to affect the market capitalization as well. The method of using the Circulating Supply is analogous to the method of using public float for determining the market capitalization of companies in traditional investing.
Another aspect of cryptocurrency market capitalization to consider involves market manipulation. Small market caps lend themselves to price manipulation more readily than large caps. Bad actors exploit small market cap coins by controlling enough of the total supply to create large price movements in one direction or another. In the early, shady days of the stock market, operators made an art of this practice, as documented in Edwin Lefevre’s book Reminiscences of a Stock Operator, first published in 1923.
A market cap is both a quick way to gauge a coin’s value, and a more than it seems. A healthy market cap is indicative of a strong coin, but developers or whales holding coins can mislead. Always weigh market cap with some of the other metrics we cover before making an investment decision.
Guest writer who contributed to this article: Josiah O. Makori