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Crypto Sally
The very first thing I check when analyzing a potential blockchain investment is the market
capitalization of a cryptocurrency (often shortened to “market cap”). There are some different
reasons why the market capitalization of a cryptocurrency is important, but the most important
reason is because of the potential for growth. Before we get into the different sizes of market
caps and why they matter, let’s talk briefly about what the market cap actually is.
“It is the market value of a company’s shares. This figure is found by taking the stock price and
multiplying it by the total number of shares outstanding.”
For equities (stock market) trading, that means we multiply the total number of outstanding
shares by the stock price and that tells us the “market value” of the company. For example, if you
started a company and issued 1,000 shares and the stock was trading at $2, then your
company’s market capitalization would be $2,000 since it would be $2 x 1,000 shares = market
cap.
When we’re looking at cryptocurrencies, things are a little different. Since we’re no longer
looking at traditional “securities,” there aren’t any shares of stock in the market. Instead, I’m
looking at the total number of coins “outstanding” and multiplying that number by the current
price of one coin or token. “Outstanding” is just another word to describe the amount of
coins/tokens that are actually in circulation. For example, we know that there will only ever be a
total of 21,000,000 bitcoins (BTC) created. Period. However, that doesn’t mean there are that
many currently in circulation now.
After checking CoinMarketCap, I can see that are currently around 17,100,000 BTC in
circulation. As time goes on and miners find more BTC, that number will go up, but for right
now, we need to use the current supply. Any coins/tokens that are locked up or not released yet
are notincluded in the market cap calculation. So, what is the market capitalization of bitcoin
then?
At the time of writing, bitcoin (BTC) is currently trading at $6,738.31. Now all we need to do is
take that number and multiply it by the total amount of BTC in circulation, which is currently
17,103,050 (out of the total 21,000,000).
After crunching the numbers, we know that bitcoin (BTC) currently has a market cap of around
$115.2 billion. It’s a pretty simple calculation, and I can almost always find out what the market
cap is of a coin by checking CoinMarketCap and searching for the cryptocurrency’s name.
It’s not uncommon for new investors to look for a “cheap” cryptocurrency that’s trading for a
low price. After all, they may remember hearing about bitcoin back when it was trading for
pennies and now think that this cryptocurrency trading at less than $1 could be “the next
bitcoin” and earn them a nice 6,000% return on investment (ROI). However, a “cheap” price for
one coin/token doesn’t mean that the cryptocurrency itself is actually “cheap” or a bargain.
If we head back to CoinMarketCap, we see that Ripple (XRP), Stellar (XLM), Cardano (ADA),
and Tron (TRX) are all trading for under $1 each, but does that mean they’re “cheap”? Short
answer: no.
Just by looking at Tron’s TRX token, I know that it’s trading for a low price (just shy of $0.05),
but it’s still the 10th largest cryptocurrency by market capitalization with a cap of roughly $3.1
billion. That tells me that for Tron’s TRX token to explode to even the $1 mark, it would need to
multiply its current market capitalization by more than 20 times and overtake Ethereum’s ether
(ETH) as the second-largest cryptocurrency, behind none other than bitcoin (BTC).
While that certainly isn’t impossible, it also isn’t terribly likely. So, when it comes time for me to
invest in a new project, I’m looking for a mixture of different cryptos by market cap. The lower
the market capitalization of a cryptocurrency, the higher the potential for growth is generally.
Ultimately, that doesn’t mean that a crypto will grow exponentially just because it has a smaller
market cap, but it does mean that there is more room and potential for it to grow.
On the other side of things, I like to make sure that I also have some of my holdings in higher
cap cryptocurrencies. Cryptocurrencies with higher market capitalizations tend to have less risk
than lower cap cryptocurrencies. At the same time, I am talking about the crypto markets here,
so obviously there is going to be some significant volatility, but not to the same extent as small
cap cryptocurrencies. The chances of bitcoin (BTC) randomly going to $0.005 on a given day is
quite low. Small cap cryptocurrencies are the exact opposite. There is a chance for them to shoot
up in price both rapidly and significantly, but there’s also the chance that they can sharply
decline in value.
Quick Summary
Cryptocurrencies with a Small Market Capitalization
(i.e. ‘Small Cap’ or ‘Low Cap’)
I consider any cryptocurrencies with a total market capitalization under $100 million to be
“small cap” or “low cap” cryptocurrencies. These are the ones with a high upside potential for
explosive growth, but they also come with increased risk. Since these cryptocurrencies, and the
projects behind them, are typically not as well established as the large coins, there is an
increased chance that they could potentially lose a lot of the value they have. In this category,
many consider even smaller cap coins (those with under $25 million total market capitalization)
to be “micro cap” coins.
Building a Portfolio
Throughout this fundamental analysis series, I’ll be covering the important steps for building a
portfolio by deciding what blockchain investments to make, and having a mix of different
market cap coins is an important piece of that. For me, I always look to diversify my investments
to find the allocation that works best for me.
For example, if I’m maintaining a limited portfolio of only 10 different coins total, then I want to
spread out my investments across different market cap coins. In the case of a 10-coin portfolio, I
may wish to dedicate 5 or 6 coins to mid cap coins since they allow me reasonable exposure to
potential growth while maintaining limited risk. After that, I would choose 2 low cap coins to
add to the portfolio. These have significantly higher risk, so I make sure that they’re not making
up the majority of my portfolio but still allow me to have coins with high growth potential in the
portfolio. If they should happen to fail completely, I won’t lose all my portfolio…that’s why I do
the next 11 steps though, which I will get to in the coming articles. Lastly, I dedicate 2–3
positions in my crypto portfolio to high cap cryptocurrencies since they remain the lowest risk.
The key to building any portfolio is defining your objectives early on (High growth? Low risk?
Slow growth? Long term? Short term? etc.…) and finding a system that works best for you.
Happy Trading!