What Is Market Cap?

How do you calculate it and what does it mean to investors?

As you dive into the world of cryptocurrency, one of the terms you'll hear often is "market cap". You'll also hear related terms like "small-caps" and "micro-caps" throughout your journey.

Market cap is an essential metric in both traditional finance and crypto.

In today's post, we'll talk about what market cap is, how to use it, and how to compare it with other metrics to decide if a token or project is right for you. Let's get started.

Market Cap: An Overview

Market cap is used in traditional financial markets to better understand a company's size and overall value. It’s calculated by multiplying a company's share price by the number of shares outstanding.

For example, if a company has 1 million shares outstanding and its stock price is $50, its market cap would be $50 million.

The market cap is necessary because it gives investors an idea of how much a company is worth.

If a company has a high market cap, investors believe it has a lot of growth potential.

A company with a low market cap may be less attractive to investors because they think it has less upside potential. Either way, market capitalization is an essential metric for investors to consider when evaluating a publicly traded company.

Companies are divided by market capitalization, which separates them as large-cap, mid-cap, or small-cap.

Large companies have a market cap of $10 billion or more, whereas mid-caps sit between $2-$10 billion. Lastly, up-and-coming companies valued from $300 million to $2 billion are known as small-caps.

Any company with a market cap of less than $300 million may be known as a micro-cap, or if the stock price is less than $5, a penny stock.

Now that we know what market cap is and how it's used in traditional finance let's look at how it's used in the world of cryptocurrency.

Market Cap in Crypto

In crypto, the market cap is calculated by multiplying a token's price by the circulating supply. The circulating supply is the number of tokens that are currently in circulation.

For example, let's say that a token has a price of $1, and there are 100 tokens in circulation. The market cap would be $100.

The circulating supply is important because it gives us an idea of how many tokens are actually available to trade. A coin with a low circulating supply may be more attractive to investors because there is less supply available and it may be harder to buy.

On the other hand, a token with a high circulating supply may be attractive because more supply is available, making the coin easier to sell.

Market Cap vs. Total Supply

It's important to note that market cap differs from the total supply. Total supply is the number of tokens that will ever be created. For example, if a token has a total supply of 100 and there are 50 tokens in circulation, the remaining 50 tokens are locked up or reserved and are not available to trade.

The total supply gives us an idea of how many tokens will eventually be in circulation. A token with a low total supply may be more attractive to investors because less supply is available, creating a scarcity-like effect that could potentially inflate the price.

Most DEXs and projects will discuss their token release schedule and total supply in their docs or whitepapers. Before you invest in anything, make sure you read these documents, join the community, and ask any questions that were not answered in the provided details.

Market Cap vs. Volume

Now that we know what market cap is and how it's used in the world of cryptocurrency let's look at how it compares to other important metrics.

One metric often used in conjunction with market cap is "volume". Volume is the number of tokens traded in a given period.

For example, if 100 tokens are traded daily, the volume would be 100.

Volume is significant because it gives us an idea of how active a market is. A market with a high volume is considered more active and liquid than a market with a low volume.

Total Value Locked (TVL)

TVL, or Total Value Locked, is a metric used to assess the value of cryptocurrency locked into DeFi protocols. As the name suggests, TVL represents the total value of crypto assets deposited into DeFi protocols and cannot be accessed or withdrawn until a specific condition is met.

For example, when you deposit crypto into a lending platform, that crypto is considered "locked" until you enter into a loan agreement with another party and agree to repay the loan with interest.

TVL provides a snapshot of how much value is currently being locked into DeFi protocols and can be used to assess the health of the DeFi ecosystem. TVL can also be used to track the growth of individual protocols over time. 

For example, if Protocol A has a TVL of $1 million and Protocol B has a TVL of $10 million, it's safe to say that Protocol B is growing faster or has been in the game substantially longer than Protocol A.

It's important to note that as markets rise and fall, meaning bear and bull markets, TVL will change as the price of the tokens changes with the market.

TVL VS. Market Cap

When it comes to evaluating a cryptocurrency, two key metrics are often used: market capitalization and total value locked. We’ve discussed these already, but how can a new crypto investor use these figures to research a project? 

Both of these numbers can give you some insight into the health of a given cryptocurrency, but they measure different things.

Market cap is simply the total value of all coins in circulation. So, if there are 100 million units of a given cryptocurrency, each unit worth $1, then the market cap would be $100 million. TVL, on the other hand, measures the value of all coins that are currently locked up in the form of loans, Curve model locking, staking, etc...

Using Aave as an example, it says right on its website that there is more than $7 billion in TVL. This is across 7 networks and 13 markets. It doesn't mean that the Aave token is worth anything close to that. According to Coinmarketcap, which is a decently reliable source of information, the market cap of the Aave token is roughly $1.1 billion. These are very different numbers.

Generally speaking, a higher market cap indicates a more established and well-known cryptocurrency.

In contrast, a higher TVL shows a currency that is being used actively and has attractive rewards for locking long-term or attractive rates for lending, among many other reasons. Of course, there are exceptions to this rule, but it is an excellent general guideline to follow.

Aave is a rare example of a project with a high TVL and market cap. It's one of the most trusted DeFi lending protocols, having been battle-tested for years.

The Takeaway

When it comes to investment research, market capitalization is often one of the first things investors look at. Essentially, it's the value of the tokens multiplied by the token's price.

It can be used as a way to compare different companies or protocols, and it can also give you an idea of how volatile a cryptocurrency might be.

However, you should remember that market cap is just one metric and shouldn't be used as the sole basis for your investment decisions. Instead, try to consider a variety of factors while researching.