Understanding Market Capitalization
Market Capitalization (or simply Market Cap) is the total value of all the share of a company’s outstanding share of stock. It is calculated by multiplying the current stock price by the total number of outstanding shares. Let’s say a company A has their stock currently traded at $10 per share, and there are 100 shares of outstanding.
Thus, the Market Capitalization = $10 per share * 100 numbers of share = $5,000 (is the market cap)
Market Cap is often used to classify companies into different categories based on the market cap as follows
a. Large-cap-Companies with a MC of over $10 billion
b. Mid-cap-Companies with a MC between $2 billion and $10 billion
c. Small-cap-between $300 million and $2 billion
d. Micro-cap-below $300 million
How is MC for the company (for example a private or a startup) measured?
If a company does not have any outstanding shares of stock, it does not (technically) have a market cap. Nevertheless, alternative methods such as i) Valuation by Investors-the value of the company can be estimated by looking at the latest funding round and the percentage of ownership acquired by the investors; and ii) Financial Statements-The financial statement (metrics) can provide the overall insights into the company’s overall value; are used to value a private company (or the company that does not have any shares issued).
Market Capitalization in Cryptocurrency
In cryptocurrency, market cap is the total value of all the coins that have been mined-and is calculated by multiplying the number of coins in circulation by the current market price of a single coin.
i.e., (as of 1st Sept, 2023) 19,470,000 is the current BTC in circulation at $26,031.00. Thus, the Market Cap for BTC is 19,470,000 * $26,031 = 506,823,570,000 i.e., 506.8 billion.
Thus, market cap is a rough gauge for how stable an asset is likely to be. However, given the volatility of the crypto market, the market cap or the stability of the market is susceptible to change. The analogy of a ship-a bigger ship can safely navigate bad weather condition-can be related to the BTC’s market cap. Thus, digital currencies with smaller market caps are more susceptible to the whims of the market – and can see huge gains or losses in their values. Also, in Bitcoin, you may see the ‘circulating supply’ market cap and ‘fully diluted supply’ market cap which describe the market cap against the already mined coin; and the market cap against the 21 million capping, respectively.
The Importance of MC!
Price is one of the ways to measure an asset’s (or cryptocurrency’s) value. Investors use MC to tell a more complete story and compare value across different currencies. MC also indicates the growth potential of a particular currency, stating whether it is safe to buy-comparing with other alternatives/ or altcoins.
Let us take two scenarios as follows
a. Currency A has 400,000 coins in circulation and each coin is worth Nu.1, and it’s MC is Nu.400,000
b. Currency B has 100,000 coins in circulation and each coin is worth Nu.2, and it’s MC is Nu. 200,000
Thus, we can conclude that even though the price of B is higher than A, the latter’s overall value is double the value of B.
Thus, MC allows you to compare the total value of a currency with another, so that you are best informed of the investment decisions. However, given the volatility, market trends, an individual’s financial situation, etc. matter when weighing the risks of any investment.
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