10 min de lectureMarket capitalisation is one of the tools cryptocurrency investors can use to assess opportunities. Not only does it indicate the risk involved in holding a coin, it can also serve as a useful comparison with traditional asset classes, perhaps most appropriately with precious metals given bitcoin’s digital gold narrative, and help investors build a diversified portfolio. This article explores how market cap works, for bitcoin and altcoins, and explains how to use it to make informed decisions.
Understanding Market Cap
Market capitalisation is a metric used to measure the size of a company by calculating the value of the total number of shares it has issued, referred to as ‘outstanding’ shares. For instance, Apple has 15,405,856,000 shares outstanding, giving the company a market cap of $3.572 trillion based on its share price of $232.98 (as of July 2024).
Investors split companies into three categories according to their market cap, although there’s no industry standard for the values applied. Large-caps are typically worth at least $10 billion, while mid-caps range between $2 billion and $10 billion, and small-caps from $250 million to $2 billion.
Investors pay attention to a company’s market cap because it provides information about what kind of opportunity it offers. Large-caps such as Apple (the world’s 2nd most valuable company as of July 2024) are well-established and generate consistent revenue streams. They’re unlikely to deliver exponential growth, so the majority of returns may come from dividends. Conversely, small-caps may offer substantial room for growth, but that potential comes with higher risk.
Market cap can also be applied to the crypto markets. Instead of outstanding shares, the calculation involves the circulating supply of coins. In bitcoin’s case, its current price of $58,213.20 and circulation of 19,719,959 equates to a market cap of $1.14 trillion (as of July 2024). Investors use the metric in a similar way to the stock market- ‘large-cap’ coins like bitcoin and ether ($375 billion as of July 2024) are considered relatively low risk (in crypto terms) due to their liquidity. On the other hand, small-cap coins, especially at the lower end of the valuation range, may have shorter lifespans.
Comparing Crypto with Traditional Investments
The S&P 500 consists of the 500 biggest publicly-listed companies in the US. At $45.84 trillion, it significantly dwarves the overall value of the crypto market, calculated by CoinGecko at $2.25 trillion (as of July 2024). Given bitcoin has previously been compared to a tech startup in terms of its growth trajectory since launching in 2009, not to mention its disruptive nature, the tech-heavy NASDAQ index offers another benchmark.
Considering bitcoin increasingly acts like a store of value as it matures, comparing it with the precious metal markets is perhaps more appropriate. Gold and silver were originally used as mediums of exchange, in gold’s case dating back to ancient Egypt, while silver became popular in the 16th and 17th centuries as the main ingredient in the Spanish dollar. Gold’s financialization accelerated in the 19th century when countries started tying it to the value of fiat currencies like the US dollar. The gold standard, as it was known, was eventually scrapped by the US in 1971, but gold had cemented its status as an asset class. Even though neither precious metal serves as a form of money any longer, their intrinsic properties (scarcity, durability and divisibility) and other uses, such as in jewellery, mean that investors treat them as a store of value that they turn to during market turbulence or inflation.
Bitcoin shares many of the characteristics of a store of value. Some believe that it could be more effective than gold due to its digital nature. Bitcoin’s circulation is capped at 21 million, its smallest denomination is a Satoshi (0.00000001 btc), and holders can store it in a digital wallet (gold must be deposited in a physical vault, which increases transaction costs).
Analysts at Goldman Sachs think bitcoin has the potential to gain market share as a store of value. However, gold is the largest individual asset by market cap ($16.033 trillion as of July 2024), but silver ($1.76 trillion) is within much easier reach. Overtaking silver will represent another major milestone in bitcoin’s history, reinforcing its status as a mainstream asset class.
Importance of Monitoring Market Cap
In addition to assessing risk, market cap can encourage investors to diversify their portfolios. Bitcoin dominance, bitcoin’s share of the total crypto market, currently stands at 54.71% (as of July 2024). Despite its size and liquidity, investors should consider holding altcoins too so if one asset falls, it shouldn’t disproportionately impact overall performance.
While bitcoin’s blockchain is catching up in terms of functionality, much of the innovation taking place in crypto is coming from altcoins, such as GameFi and tokenization of real-world assets. As mentioned earlier, these altcoins are small or mid-cap by bitcoin’s standards, but they offer the potential for significant growth.
CoinShares issues two exchange-traded products (ETPs) tracking indices holding multiple coins: the Physical Top 10 Crypto Market ETP and the Physical Smart Contract Platform ETP.
Market cap can also serve as a bullish or bearish indicator. A rising market cap may indicate a positive shift in sentiment, as experienced by bitcoin between October 2023 and March 2024 in anticipation of the latest halving and following applications to launch spot exchange-traded funds in the US, which the Securities and Exchange Commission approved in early 2024. However, investors should watch for what the crypto community calls ‘altcoin season’, when altcoins outperform bitcoin. The last time this effect occurred was between 2020 and 2021, when non-fungible tokens (NFTs) rose to prominence, and bitcoin dominance fell as low as 40%.
Conclusion
In traditional finance, market capitalisation measures a company’s size based on the value of its outstanding shares. Investors use this metric to assess the trade-off between risk and return before purchasing a share. It can be applied to crypto by calculating the value of the total number of coins in circulation.
Investors can compare the crypto market cap with stock markets, but perhaps a more appropriate comparison is with precious metals, given bitcoin’s ‘digital gold’ narrative. Gold is the biggest market by individual asset, but bitcoin is catching up on silver, which would cement its status as a mainstream asset class.
Market cap also encourages investors to build diversified portfolios by holding altcoins, while changes can serve as a bullish or bearish indicator.
