What is capitalization? Explained in simple terms

In the traditional financial world, as in the crypto world, market capitalization plays a very important role, serving as a key indicator of a project/company.

Capitalization is a term that refers to the total value of all of a company’s assets and the funds invested in it. When it comes to crypto projects, the so-called market cap refers to the total price of all coins currently in circulation. The formula for calculating it is as follows: multiply the current price by the total number of coins in circulation.

How to calculate the market capitalization of a crypto coin?

The capitalization of cryptocurrencies is similar to that of free circulation on the stock market.

Market capitalization = Current value x Number of shares in circulation

For example, let’s take one of the major cryptocurrencies – Ethereum (ETH). The price of this cryptocurrency is currently around $2,976. The current volume of shares in circulation is 120.71 million ETH.

capitalization of the company's interest

$2,976 * 120.71 = $356.81 billion.

The market capitalization of the top ten cryptocurrencies usually remains more stable, as these coins are less volatile than altcoins.

However, the dynamics of Bitcoin’s price growth show that even market leaders can surprise with significant growth. Just look at the growth of BTC‘s market capitalization. After rebounding and falling, the currency’s capitalization has been growing rapidly since December 2022, rising from $321 billion to $2.3 trillion.

Why it is important to know about capitalization

This indicator is used to evaluate various cryptocurrencies and to compare their stability and potential.

It is fair to assume that a cryptocurrency with a larger capitalization will be a more stable investment. A cryptocurrency with a smaller capitalization will be more susceptible to external influences and capable of generating both huge profits and dramatic losses. You can make “X” bets on them if you are prepared to risk the probable loss of your investment.

It is worth noting that market capitalization in the crypto world does not reflect the amount of cash, which distinguishes it from capitalization in classical finance. Since the price of a coin can significantly affect this indicator, it is much more important to consider the volume (the number of coins exchanged during a certain period) and liquidity in order to assess its overall prospects.

Classification of cryptocurrencies according to market capitalization

Major currencies

These are coins with a market capitalization of hundreds of billions, and in some cases trillions, of dollars. Investors consider them less risky investments because they have a proven track record of growth and high liquidity, which is just as important as capitalization.

Liquidity is an indicator of how easily you can convert an asset into cash or another asset. Thus, if you can easily and quickly buy or sell a cryptocurrency without significantly affecting its value, then you can say with confidence that this cryptocurrency has high liquidity.

Medium-cap currencies

For these coins, this indicator reaches $1-10 billion. Such projects can skyrocket in the long term, but at the same time, they are risky.

Low-cap currencies

Their capitalization has not yet reached $1 billion. They are most susceptible to sudden fluctuations depending on market sentiment. You can make a fortune on such coins, but you can also lose just as much.

Always give preference to projects with large reserves of the cryptocurrency you are interested in so that you do not experience difficulties with purchasing or exchanging it. Coin24 offers a wide selection of digital assets for trading, buying, and selling, including larger reserves of cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), Tether (USDT), and Litecoin (LTC).

How capitalization affects the value of tokens

In the case of the crypto market, we can talk about a direct relationship. Lower capitalization can potentially lead to greater volatility, while higher market capitalization will ensure high stability. A stable cryptocurrency is usually in high demand due to its perceived lower risk level. This is how market capitalization can easily influence the value of certain cryptocurrencies.

Capitalization in the crypto world is an indispensable tool for comparing the total value of cryptocurrencies. However, it is important to remember that when assessing the risks and prospects of your crypto investments, you need to take into account market trends, the stability of the cryptocurrency, its volume, liquidity, and many other secondary factors.

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