What Does Market Cap Tell You About Cryptocurrency?
Market capitalization of cryptocurrency represents the dollar value of the currencies circulating coin supply. It is calculated by multiplying the price per coin by the total coins in circulation. While market capitalization can be an indicator of the value of a cryptocurrency, it does not always represent its real value. A lot of times, digital assets can be overvalued or undervalued.
Nevertheless, market cap can tell a story. Cryptocurrencies with low market caps could have the potential for high growth in the future but such potential may be equalled or surpassed by high risks. Such projects may be in their infancy with a lot of milestones to achieve.
Lower Trading Volumes
Research indicates that coins with lower market capitalisation usually has lower average trading volume. This can make it easier to pump up prices. The median price increases are as follows:
- 3.5% (4.8%) for pumps on Discord (Telegram)
- Using the top 75 coins; it was 23%
- (19%) on Discord (Telegram) for coins ranked over 500
It’s quite hard to consolidate prices of cryptocurrencies. Coins with lower market capitalisation usually have lower average trading volume. This can make it easier to carry out pump schemes.
While market cap shows us the position of crypto in relation to other financial markets, it is important to consider the suggestions of economists. Interestingly, many economists suggest bitcoin poses less of a significant risk on the economy. Economist at Université Libre de Bruxelles believes that the market cap of cryptocurrencies remains modest, compared to the size of ‘conventional’ financial markets. Taking this into consideration, one can imagine how small the market is. Scalability and speed are other issues which if not addressed, makes it less competitive in contrast to the likes of Visa.
Ordered Chaos Meets New Technology
For better or for worse, market cap websites for crypto were created to make sense of the ‘ordered chaos’ that was met when trying to compare cryptocurrencies. A deeper look at market cap for cryptocurrencies gives several indications including unreliable Insight into the amount of capital invested, little indication of the quality of the cryptocurrency , and a greater indication of marketing of the digital asset.
Total market cap represents the market cap of all virtual currencies added together. More than 50 percent of the cryptocurrency market cap is Bitcoin alone. This is because most trading occurs between BTC and altcoins since you cannot convert fiat. Taking this into consideration, the nature of market caps for many cryptocurrencies which are based on ERC-20 may become more apparent. This means that an individual that wants to purchase TRX for example, would have to purchase BTC first. Buying BTC influences the market cap positively as every purchase would increase the price and in-turn the market cap.
It is important to have a healthy skepticism toward market cap but also appreciate the stories behind it. The underlying technology of a lot of cryptocurrencies will ultimately overshadow the market cap. Security deficiencies and other facts can quickly erode significant market cap potential.
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