When talking about the performance of a cryptocurrency, the most obvious indicator and the one usually turned to first is the price of the cryptocurrency. It seems like a pretty simple relationship: the more a cryptocurrency is worth in real money, the more value it has. This leads to erroneous simplifications, for example, that a cryptocurrency is "better" or has more quality if it has a high price.
Regardless of whether to classify cryptocurrencies as better or worse It is a basic errorthere are other indicators to look at, beyond the price, if you want to know the relative value of a cryptocurrency and whether it is a good idea, or not, to invest in it. One of the most reliable is the market capitalization or market cap. But what exactly is it?
What does market capitalization mean?
Market capitalization is a form of calculate the “size” and popularity of a cryptocurrency. It is calculated by multiplying the current value of a cryptocurrency by the amount available. That is, if a cryptocurrency has 1,000,000 units in circulation and each one costs five euros, its market capitalization will be 5,000,000 euros.
However, market capitalization is not equivalent to the money a cryptocurrency moves at any given time. In the previous example, if the cryptocurrency increases its price from five euros to seven, the market capitalization will be 7,000,000 euros, but that does not mean that 2,000,000 euros have entered the market.
It is a pretty good metric for calculating the size, popularity, and performance of a cryptocurrency and its associated project. In this way, by taking into account the available supply in addition to the price, you can get an idea of how much a cryptocurrency may be worth in the future. If there are billions of tokens of a crypto and its value is, for example, 50 cents, it is unlikely that it will reach prices close to Bitcoin, since it would have an exorbitant market capitalization.
Let's look at a real example. The market capitalization of Bitcoin is the highest, and is currently equivalent to $1,079,227,630,853, with a price of about $57,000 per Bitcoin for each of the more than 18,500,000 BTC that exist.
On the other hand, Ripple's (the fourth largest) is two orders of magnitude smaller, and is equivalent to $44,574,794,840. However, the difference in price and quantity in circulation is abysmal. There are currently 45,404,028,640 units, with a price close to the dollar.
Despite Ripple's low price, its market capitalization is the fourth largest, and in fact, it is one of the most popular cryptocurrencies, being the favorite of companies dedicated to banking that have decided to enter the world of cryptocurrencies.
Market capitalization is therefore a very good indicator when deciding whether to invest or not in a cryptocurrency, but of course it is not the only one and good research is always required before investing money.
Leave a Reply