A well-known attribute of cryptocurrencies is their wild fluctuations in price. Although highly risky, the sudden variations in price are responsible for the huge profits that investors can make overnight. Like with any investment, a considerable amount of research is needed to make informed decisions when choosing the right cryptocurrency to buy. While these assets help a lot of investors make millions, the rapid change in prices also leads to great losses for many.
Anyone interested in acquiring any crypto asset has to take multiple factors into consideration in their decision-making; the leading among them is the asset’s market capitalization and volatility. For the most part, both factors influence each other, and a closer look at them together offers a better perspective to the crypto investor. It educates one about the relative size of the cryptocurrency and the price fluctuations it undergoes, which is hard to assess by looking at the price of an individual unit of the digital currency.
What Is Cryptocurrency Market Capitalization?
The market capitalization (or market cap) of a cryptocurrency offers a bigger picture of the asset by representing the fiat value of all its coins or tokens in circulation. It is derived by simply multiplying the total amount of coins in circulation by the value of each coin.
For example, if cryptocurrency A is priced at 500 USD for each coin and the total number of this currency in circulation is 100,000 coins — its total market cap would be 50,000,000 USD. This means of quantification is exactly like calculating the market cap of a publicly traded company. It is derived by multiplying the price of each share by the total outstanding company shares.
How Market Capitalization Helps Investors
The market cap of a publicly traded company is a major indicator of its performance as it directly indicates the market’s confidence in its functioning and potential. Moreover, the market cap of two companies can be similar in value, but the outstanding shares of one company can be half of the other, indicating it is performing better. Such information helps investors in deciding what stocks to buy.
Similarly, a lot can be said about cryptocurrencies by their market cap. It indicates a lot of factors like the efficiency of a project’s tokenomics where the cryptocurrency finds its utility, and its popularity in relation to other cryptocurrencies. For example, the market cap of bitcoin, the world’s most popular cryptocurrency, is significantly higher than that of Ethereum, even though the former has a smaller coin supply.
Market caps are also used in TradFi to understand the volatility exhibited by a company’s stocks. By the size of their market caps, companies are segregated into different categories like large-cap, mid-cap, and small-cap. The volatility of various cryptocurrencies, too, can be assumed via such parameters — although they are highly volatile assets in general.
What Is Cryptocurrency Volatility?
Volatility can be understood as a combination of the fluctuation in the prices of an asset — high or low, and the frequency with which it fluctuates. Cryptocurrencies provide investors with huge returns in small time frames because of their volatility. The potential for huge profits is greater when the value of an asset can increase exponentially in a matter of a few days or weeks.
However, crypto assets are known to be immensely risky investments because of their volatility. The velocity with which their value rises is conversely possible too, which can drive huge amounts of capital into the ground. However, by using metrics like a cryptocurrency’s market cap, one can realize the extent of its volatility.
The Relation Between Market Capitalization and Volatility
Cryptocurrencies, like publicly traded companies, are segregated into large-cap, mid-cap, and small-cap currencies. This classification provides better information about the volatility of the assets in each of these segments. Coins like Bitcoin and Ethereum are two of the biggest cryptocurrencies out there, and their market caps are in the hundreds of billions, making them large-cap cryptocurrencies.
Large-cap cryptocurrencies are generally less volatile and safer to invest in, compared to those in the other segments. They are well known and have large amounts of tokens in supply spread across a more diverse investor base. The popularity of these coins leads to them being traded in huge volumes. The constant liquidity present across all major exchanges makes it less likely for their prices to fluctuate drastically despite large sums being bought or sold. Large transactions can trigger changes in the value of the assets, which fall into categories like micro and nano cap — tokens that are newly introduced without much utility, like meme coins.
Large-cap assets, however, have a lower potential to generate large profits quickly as compared to small-cap currencies that can bring in millions in profits overnight thanks to factors like social media buzz. Of course, the returns seem tempting, but small-cap cryptocurrencies are highly risky investments.
Analyzing Market Caps and Volatility Is Only the Beginning
Factors like market capitalization and volatility can be used as indicators to identify the nature of one’s potential cryptocurrency investments based on their risk appetite. Of course, investors need to analyze other factors, too, like the asset’s utility, trading volume, and popularity. Making informed decisions can go a long way, with investors averting losses while treading the volatile cryptocurrency markets.
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by Liminal
