Cryptocurrency

Why Understanding Market Capitalization Is Key To Crypto Success

Crypto can be a great tool for obtaining financial freedom, but not all crypto is created equal. Understanding market cap can help you avoid investing in duds. 

Anyone who has spent time hanging around cryptocurrency subreddits has probably heard some play on the phrase, “Bitcoin was worth less than a dollar a few years ago.” 

This reply is usually used as a justification for a coin’s low current price by enthusiastic supporters (or shills) who want it to go “to the moon!” 

At first glance these claims often seem reasonable. After all, if one project can do it, why not another? However, the answer often comes down to tokenomics which can be seen most easily using a simple piece of math called market capitalization. 

What Is Market Capitalization? 

Market capitalization, often abbreviated to market cap, is a concept found in all aspects of finance. In a general context, it refers to the total dollar market value of a company’s outstanding shares of stock based on the market price of a single share. 

In a crypto context, market cap refers to the total value of outstanding tokens based on the market price of a single token. 

Bitcoin vs Apple

For example, at the time of writing, Bitcoin (BTC) is worth $55,825.34 per BTC. This equates to a market capitalization of around $1.51 trillion, based on the current circulating supply. For reference, the market capitalization of Apple is around $2.37 trillion.  

You can do this for pretty much any token, but the example above gives you a general idea of the value of the assets currently tied up in cryptocurrency. 

So how does this help you understand how far a crypto project can go? 

Dogecoin vs Goldman Sachs

Let’s look at a low-value, high-volume token like Dogecoin (DOGE). There are 131,610,462,914 dogecoin in circulation at the time of writing and it has a price of $0.2487. This gives DOGE a market cap of around $2.28 billion. 

Let’s see what would happen if DOGE was to reach a dollar, as its enthusiastic community often claims it will do. That would give DOGE a market cap of $131.6 billion, making it worth roughly as much as the bank Goldman Sachs. It would represent a huge injection of capital into the cryptocurrency ecosystem. In short, It’s highly unlikely. 

This same thought experiment can be applied to almost any cryptocurrency and is a good way to understand the approximate medium-term potential for any token. 

However, it’s just the first step. Let’s go a little further and take a look at some more advanced “tokenomics.” 

Tokenomics Is The Study Of Crypto Economics

Economics is all about incentives. Tokenomics is about understanding the economic incentives inherent to cryptocurrency. 

One of the most important concepts of tokenomics is issuance and supply. Market cap generally takes into account only the current circulating supply. That’s certainly helpful, but to understand the long-term value of a cryptocurrency we need to understand how new tokens are created. 

Tokenomics is a very young field and there is still plenty of disagreement about the correct way to value any particular token’s market potential. However, the fundamentals of the discipline are straightforward and can be invaluable for any crypto investor looking to orientate themselves in the space. 

Bitcoin vs Dogecoin

In the case of Bitcoin, new coins are created mining and there is a limited supply. Bitcoin creates 900 new Bitcoins a day. Assuming that its price stays at a value of $40,000 then the cost of keeping Bitcoin “stable” is around $36 million per day. 

This means that there needs to be an injection of $36 million into Bitcoin every day to keep the price stable. If more than this is injected, the price goes up, if less, the price goes down. Eventually, Bitcoin will hit a ceiling where no new tokens will be issued, this makes it a deflationary asset, which is one of the key draws of the cryptocurrency. 

Let’s take a look at how this would work with DOGE. There are approximately 15 million Dogecoin minted every day. For DOGE to maintain the value of $1, it needs capital injections of $15 million per day. This level would be challenging for DOGE to sustain, particularly because it has no hard cap on the total floating supply, making it more inflationary than Bitcoin. 

The above is a very basic version of tokenomics and many other factors can influence your decision to purchase a particular coin — including regulations, real-world utility, new developments, etc. However, even a basic analysis like this can make it easier to understand the likely potential of a particular token. 

Don’t Just Buy Into Hype

The crypto world, particularly during bull cycles, is defined by a lot of hype. Many less scrupulous individuals seek to take advantage of this by creating poor-quality projects designed to cash in on people looking for a “cheap” token. 

The reality is that the price of an individual token alone doesn’t mean very much. Bitcoin is “expensive” compared to something like DOGE, but that doesn’t mean that DOGE is a better deal. 

When doing research, make sure to look at both the coin’s technological foundations, but also how it is supposed to operate in a market sense. By taking these relatively simple steps you’ll be able to avoid the worst of the scams, and you might even identify a gem or two along the way.

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