Market cap: What is it and how is it useful?

Market capitalization — or market cap for short — is the total market value of a token’s circulating supply. You can calculate a token’s market cap by multiplying its circulating supply by the price of a single token.

Let’s say there is a project with 10,000 tokens and currently, each token’s price is 10 USD. By multiplying 10,000 by 10, you get a market cap of 100,000 USD. Note that the circulating supply of crypto projects is constantly changing — they can create new tokens by mining, and destroy tokens by burning. Therefore, both circulating supply and the token price affect the market cap.

Market cap categories

You can compare the market caps of various tokens to make more informed investment decisions. Depending on their market cap, tokens belong to one of three categories:

Large-cap tokens: These tokens have a market cap of more than 10 billion USD, and can be found on on most exchanges. They also have lots of liquidity, which means no slippage and lower risk.

Mid-cap tokens: These tokens have a market cap of 1 billion to 10 billion USD. These are the tokens with lots of upside potential but which also pose higher risk. Mid-cap tokens can be good investments but they require more research before investing in them.

Small-cap tokens: These tokens have a market cap of under 1 billion USD. They suffer the most significant losses once the market faces any negative news. To buy and sell them, you might have to go to decentralized exchanges.

A good rule of thumb is that the large-cap tokens are more likely to be stable investment options. While small-cap tokens can see gains of more than a hundredfold, they can also quickly lose all their value.

The volatility of the largest tokens like Bitcoin and Ethereum can be significant, but they are also more likely to grow in price over time. Tokens with larger market caps usually have proven working products, loyal communities, and other fundamentals that make them less prone to an absolute crash.

Comparing different tokens’ market caps

The most common crypto investing mistake beginners make is looking only at a token’s price. For example, they might think, “The price of XRP is currently under $1. Maybe the price will rise above BTC’s soon.” The problem with this kind of thinking is that it fails to take into account a token’s market cap.

XRP (XRP) (screenshot from CoinGecko)

The market cap tells us about the growth potential of a token. As the images above show, XRP’s circulating supply is over 2,500 times that of Bitcoin’s. As such, each token represents a smaller part of the entire supply, which is why it is harder for XRP to rise significantly in value compared to Bitcoin.

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