Market Cap

Shortening for Market Capitalization. It is the overall market value of a cryptocurrency usually expressed in dollars. It is calculated by multiplying the existing number of coins available by the price in dollars of each coin. It is also called the circulating supply. The term comes from public stock investing where it means the value of a company calculated by multiplying the number of stocks issued by the value of each stock.

In both cases, cryptocurrency and stock, investors believe that a bigger market cap equals a lower investment risk. Smaller companies or smaller cryptocurrencies are more likely to fail than big ones. A bigger market capitalization offers greater protection against market manipulation. It is easy to manipulate the market to your advantage when you have few people holding a big percentage of a particular cryptocurrency or company stock.

Bitcoin (BTC) has always had the biggest market capitalization of all cryptocurrencies but it is still susceptible to price manipulation. Early miners and investors who managed to acquire a sizeable amount of Bitcoins in the early days and held onto it, can occasionally sway the market in their favor. The same happens when you have major investors purchasing a sizeable amount of coins in the open market.

Dead coins and the inaccuracy of market value

In the case of cryptocurrencies, the market capitalization doesn’t truly represent the actual value of the circulating supply. Some coins have been lost by the owner or have been stolen, and the thief cannot use them. They are therefore dead coins, and while still counted as existing, they are out of circulation for good.

A more accurate way to establish the actual market capitalization would be to subtract the dead coins from the total and then multiply the result by the current price. Yet it is very difficult to ascertain the number of dead coins. Therefore it is difficult to establish the future of a cryptocurrency based on its market cap value. It only gives you an idea of the relative importance people attribute to a specific cryptocurrency in comparison to another.

In stock trading, you can analyze the company and its capital value to make an informed guess about its future trends. In traditional currency trading, you look at nations, their policy, their stability and derive an estimate about the future value of their economy. In cryptocurrency, you need a totally different approach.