Introduction
The cryptocurrency market is in a constant state of growing and shrinking. An investor can never be too sure where to put their capital. Creating a perfect crypto portfolio can be a real challenge. Technical analysis can require a lot of experience to master and understand.
During the time that the investors are venturing to learn by reading the market movements, they can be losing valuable time to earn profits on crypto trades. There are some indicators such as Market Capitalization that can help investors make the best trading decisions in a limited time.
What is Market Capitalization?
Market Capitalization is the total value of a cryptocurrency project based on its latest market standing. Therefore, Market capitalization can be seen as a market indicator that investors can use to measure the performance of a cryptocurrency within a specified time duration.
Market Capitalization is often used by beginners who are just getting into the cryptocurrency markets to understand how the digital asset has been faring against the changing forces in the market.
Investors who are depending on fundamental analysis of the market can benefit from different projections of market cap to make the best trading decisions for their cryptocurrency portfolios.
Why is Market Capitalization Important?
Market Capitalization is an important metric because it can tell a lot about the performance and impact of a cryptocurrency. Furthermore, it is very easy to read Market Capitalization and there are many free cryptocurrency market aggregators such as TradingView and CoinMarketCap that share the updated projections for all market cap changes for just about all cryptocurrencies.
If the market capitalization of a cryptocurrency is shrinking over time investors may be alerted to sell it.
At the same time, the investors may also find the perfect position for entering a new crypto position based on the declining market capitalization. Furthermore, depending on the trading strategy the investors can choose to keep holding their cryptocurrencies in case of a bullish trend in market cap.
The market cap is also used to measure the market dominance of a cryptocurrency. For example, the Bitcoin market cap suggests that it has the largest market share in the aggregate market capitalization of the entire cryptocurrency market. Investors can swap to safety if the market cap of a stablecoin has started to dwindle.
How to Calculate Market Capitalization?
Every cryptocurrency investor needs to learn how to measure the market cap of a given cryptocurrency. The first and easiest way is to use the online free aggregators that list all the cryptocurrencies with their updated market caps.
However, it is important to notice that the readings provided for free by different crypto aggregators can be biased. Any aggregator that is working for free is not bound to maintain the quality of the service for their consumers.
Furthermore, the market capitalization on different platforms can also differ on account of changes in supply and demand.
Investors in one country might have to pay more premiums on their cryptocurrency purchases. It is also possible that the Automated Market Makers or AMM can project different market cap projections based on the supply and demand of the cryptocurrencies present in the liquidity pool of a cryptocurrency enterprise.
Therefore, investors who wish to calculate the accurate market cap without any manipulation and margin of error can run a node. It will allow them to download the on-chain data and accurately calculate the current market cap reading.
Users who are trying to calculate the market cap of a cryptocurrency independently can use the following formula:
Market Capitalization = Spot Price of a Cryptocurrency x Total Circulatory Supply
How to Use Market Capitalization to Measure the Popularity of a Cryptocurrency?
Market Capitalization is a baseline indicator that can be used to measure the current standing of a cryptocurrency. It is a type of crypto market indicator that might not be useful alone but when paired with other indicators such as time and supply, it can paint an accurate picture for the cryptocurrency investors for making the best trading bets for the investors.
Many market analysts make an active effort to measure the accurate market cap and they may also use the market cap projections based on various time stamps. For example, it can be interesting to see how a cryptocurrency market cap has formed over a year, a month, a week, and a day.
For a specified duration, if the market cap of a cryptocurrency is showing a consistent increase, it can mean that the investors in the market are buying it actively. The bigger buying pressure and trading volume a cryptocurrency harbor; the greater it’s market popularity. The rise in the market cap can also answer questions like a spike in transaction fees and premiums.
The investors can also understand other important factors such as overbought and oversold areas for a cryptocurrency based on its market capitalization changes. Market cap is useful indicator when it is used in combination with a host of other crypto market factors and metrics.
Types of Market Capitalization
Based on its market capitalization results, cryptocurrency investors and market analysts can also divide cryptocurrencies into different categories. Whenever there is a classification of cryptocurrencies, it makes it easier for digital investors to make sense of the market without putting in more effort.
There are more than 10 thousand cryptocurrencies in the market at present and it can be a real challenge for cryptocurrency investors to make sense of the massive data sets. Therefore, using Market capitalization the investors can categorize these cryptocurrencies into defined groups and use it as a filter for the better observance of the crypto market.
Here are some important sections that cryptocurrencies can be divided into based on their market capitalization projections:
Large-Cap Crypto
There is no formal limit set for defining a cryptocurrency as a large-cap currency. However, there is a general consensus that the top 10 cryptocurrencies by market cap on the global leaderboard are awarded the title of being the large-capped cryptocurrencies.
The most consistent top 10 cryptocurrencies are Bitcoin, Ethereum, BNB, and others. Retaining a position as the top 10 cryptocurrencies can warrant that the cryptocurrency in question has managed to maintain consistent goodwill among investors.
Furthermore, large-cap currencies also have smaller market caps and the best liquidity. Therefore, their risk ratio is often smaller in comparison to others.
Middle-Cap Crypto
Once again, there is no defined rule for middle-cap cryptocurrencies. However, in general, most analysts and investors agree that the top 11-50 cryptocurrencies ranking on their market cap can be considered mid-cap cryptocurrencies. Mid-cap currencies are thought to possess greater potential energy for price appreciation.
However, their risk percentages are also bigger than large-cap currencies. It is best to research individual currencies to make the best trading decisions as mid-cap may be affected greatly by fundamentals and technical forces.
Small-Cap Crypto
Now that the large and mid-cap cryptocurrencies have been filtered out, what remains can all be added to the small-cap currency group. Small-cap currencies are the lowest-ranked cryptocurrencies for investors. They are often targeted by threat actors to conduct pumps and dumps.
However, there are also a very small percentage of credible crypto projects that may start as small-cap currencies and the lucky investors can get a leg ahead in the market by getting the chance to invest in them first. Small-caps currencies are where most retail investors hope to make exponential profits.
Diluted-Cap Crypto
The diluted-cap of a cryptocurrency is an important metric that every investor should know about. It can tell the difference between the total market cap and the expected market cap. In the shares market, diluted cap is used to measure the strength of a company based on its number of outstanding shares.
In the cryptocurrency market, the diluted market cap can help investors measure the total strength of a blockchain product based on its total token strength. The average market cap reading is the total circulatory supply for Bitcoin multiplied by its current per-unit price.
However, the diluted cap of Bitcoin can be calculated by finding the product of its total supply and spot price.
What are Some Trading Misconceptions Connected to Market Capitalization?
Market cap is the first thing that an investor notes about a cryptocurrency. However, it is important to note that most professional investors do not base their trading decisions on market cap readings alone.
There is much to unpack when it comes to market capitalization. Several time stamps can convert a positive market cap reading into a negative projection and vice versa. Market caps can serve as a base for performing fundamental analysis of the market rather than serving as an analytical metric on its own.
Any professional broker would not suggest that investors use the market cap of a cryptocurrency as the sole indicator of its popularity, stability, and total value. Depending on the current market conditions, cryptocurrencies can become over-value or under-valued.
Furthermore, market cap does not tell the full story about the potential growth or possible decline of a cryptocurrency without comparing it with other factors. Anyone who is trying to create a perfect trading strategy based on market cap alone may suffer from massive losses eventually.
Which Technical Indicators Use Market Capitalization?
As mentioned before, Market capitalization is an important metric that is used to perform analysis in combination with other indicators. At the same time, it is also important for technical analysis purposes, as many of these indicators a baseline values.
Investors must always be invested in finding accurate market cap readings to ensure that they get the best results. Here are some important technical indicators that need market cap as input:
Times-Revenue
Times-Revenue is added to this list but it is a fundamental analytics tool. It is used by stock traders to measure the selling price of a company based on its revenue generation during the last 12 months. It can help the investors understand how much an acquisition company would be willing to pay for this product based on its production report for the last year.
Cryptocurrency investors can use market capitalization reading rather than monthly earnings to calculate its Times-Revenue value which can be read as an alternative for its price-earnings ratio or PEO.
Relative Strength Index (RSI)
Relative Strength Index or RSI is used to determine whether a cryptocurrency is over-bought or over-sold. At any given point in the trading cycle, the investors can understand whether to invest in a given cryptocurrency or refrain from it based on the RSI readings. In most cases, RSI takes the magnitude and the speed of a given cryptocurrency.
In this manner, simple RSI readings are based on the latest unit price changes for a given cryptocurrency. However, there are some derivative RSI indicators such as RSI Season Trackers that may use the market cap of different cryptocurrencies such as Bitcoin and other altcoins.
To this effect, cryptocurrency investors allow users to measure the strength of a given digital asset to find out the market strength of a particular currency.
Network Value to Transaction Ratio (NVT)
Network Value to Transaction Ratio or NVT is a market indicator that is used to measure if a blockchain is over or undervalued. It is a type of market ratio for a given cryptocurrency project.
Investors can calculate the NVT ratio for any given cryptocurrency by dividing its total market capitalization at any given time by its transaction volume. If the result for the indicator is bigger than the red line it can indicate that the blockchain project is overvalued.
On the other hand, if the ratio is smaller than the red line, it indicates that the cryptocurrency is currently undervalued. Variations for NVT can compare the short signal and long signal such as Golden Cross.
By comparing short and long-term NVTS investors can find out whether the blockchain has short-term dominance which means that it is overpriced or vice versa. There is also a divergence within the NVT ratio and it is used based on a daily time frame.
Average Daily Range Percentage (ADR%)
Average Daily Range percentage (ADR %) is a technical indicator that can help investors understand the average movement for a given cryptocurrency. It is distinct from other average moving indicators because it can project the results for a given cryptocurrency outside of the time frame.
In most cases, moving averages allow the investors to measure the strength of the market to understand the movement of a cryptocurrency based on the time-lapse. However, ADR% can be a useful indicator for investors who are looking to measure the average movements of a given digital asset that is independent of any time-related changes.
Crypto Market Cap Oscillator
The Crypto Market Cap oscillator is a technical indicator that tracks the regular changes for a given digital asset based on its market capitalization. It can assist analysts in finding the best-selling and purchasing positions for a given cryptocurrency.
At the same time, it is also a composite indicator that is based on 100 oscillator inputs. The green formations can be seen as buying signals meanwhile the red line formations can are marked down as ideal selling signals for investors. It is a type of comparison between one cryptocurrency market cap and the aggregate market cap trend formed by 100 base oscillators.
Bitcoin and Altcoin Dominance
At any given point, the investors need to understand the correlation between Bitcoin and other altcoins. Bitcoin has been carrying the entire cryptocurrency market since the beginning therefore most technical analysts pay more attention to the Bitcoin market dominance at any given time.
For this purpose, the investors can use the comparative analysis between Bitcoin and other altcoin market caps. However, there are some cases where analysts may also measure the market dominance of an altcoin with a specified pair of currencies or against the entire crypto market cap.
For all its variations, investors can find out important insights from the market and they require the updated value of the market cap for every cryptocurrency under analysis to perform this calculation.
Market Sentiment
Market Sentiment is the collective state of mind towards a given cryptocurrency. Many individual technical analytical services providers have created sophisticated market sentiment indicators and most of these indicator use market cap feeds.
Therefore, the market cap is a valuable means to understand if a cryptocurrency harbors positive or negative sentiment among investors.
Crypto Market Breadth
Market Breadths are used to determine the direction of a cryptocurrency in the near or long-term future. It can be difficult to predict the future of a given cryptocurrency price. However, the investors can achieve some degree of success using the crypto market breadth using market cap and individual price movements as inputs.
The derivatives investors who make a living by placing bets on the expected market movements can benefit greatly from Crypto market breadths. There are several types of Crypto Market Breadth indicators such as advance-decline line ratio that can measure the positive inflows for a developing cryptocurrency.
On-Balance Volume (OBV)
On-Balance Volume or OBV is an indicator that is used to confirm the strength of a current trend. If OBV is advancing in the same direction as the price appreciation for a given cryptocurrency it means that it can indicate a strong trend continuation.
However, if the price is declining in comparison to the OBV line, it means that there is an increasing possibility for an upcoming correction.
Conclusion
Market cap is a baseline indicator that can be useful in many ways. It is easy to understand and most investors begin by using this to make their trading decisions. However, it is important to keep in mind that the market cap is only useful when it is utilized correctly.
Investors can use it to perform fundamental, psychological, and technical analyses of the market by understanding the importance of market cap development based on different time stamps.