How Is The Market Cap Determined?

How Is The Market Cap Determined?

When we talk about financial assets, we frequently refer to their market cap – short for market capitalization. You will often hear experts talking about the market capitalization of gold, or the Bitcoin market cap, or even compare the two assets by this metric. Companies are often ranked by their market caps. Overall, a market cap is an important concept when it comes to trading and finance.

If you are an investor or trader, or you simply wish to educate yourself on the basics of our financial system, it is important to learn what financial terms like market cap mean, and also to develop an understanding of how their definitions apply to the real world.

Finance can be an intimidating sphere for newcomers, full of professional lingo and unfamiliar vocabulary. Don’t let that intimidate you because we prepared a guide to explain what market capitalization is and how it is determined for different asset classes like stocks and cryptocurrencies.

What Does Market Capitalization Mean?

Market capitalization refers to the market value of an asset. For example, the total market value of a company like Apple can be calculated by multiplying the number of a company’s outstanding shares with the company’s stock price. The logic is simple: people can buy and sell outstanding shares of a company in the open market but there is a definitive total number of shares that are available to the market buyers. The total value of the company can be easily calculated by adding up the market price for all the shares. Since it is assumed that every share has the same stock price, you can simply multiply the number of outstanding shares with the current market price per share to calculate the company’s market cap.

When the stock price of a company increases, the market value of each outstanding share also increases. That is also true for the opposite case, i.e. when the stock prices fall, so does the market value of the shares. Basically, this means that shareholders can make a profit when market prices increase because their shares are valued more than they were initially. Or, if the stock price of a company falls, shareholders lose money because they paid more than the market value. Of course, for a frequent trader, both options are likely as stock prices can change in either direction in different periods of time depending on several factors. It takes a considerable amount of experience and research to be able to tell how stock prices will move. 

The market price of a company’s stock depends on the most recent transaction price of a company share. Traditional stock exchanges are open during the day so every evening they report the closing price for company stocks on the exchange. The closing price refers to the price of the last transaction that took place on the exchange and it can increase and decrease the market cap of a company.

How Is a Company’s Market Cap Determined?

As you may already know, not all companies are public – there are also privately held companies whose stocks are owned by founders or the management. When a privately held company goes public, that means the company’s stocks will be sold on the stock market to potential buyers. This is usually done through initial public offerings or IPOs for short. This way, companies are able to raise their capital by drawing funds from the financial markets. A company can sell all or a portion of its shares through an IPO.

The initial or starting market cap of a company is also determined through IPOs. Before the company shares are put on the market, the company can use the valuation services of an investment bank to get an estimate of how much the company is worth. Once they have an initial estimation, they can decide how many shares will be sold, and the pricing for those shares.

Once a company starts trading on the stock market, its share prices are determined by supply and demand. If the public thinks the company shows growth potential, there will be more demand and the share prices will increase. However, if the company doesn’t show promise, shareholders could short-sell their shares, driving the prices down, dragging the market cap along with them.

The market cap shows the company’s value in the market in real time. However, it is important to distinguish market cap from equity value. A company’s market cap doesn’t necessarily reflect its value as a business since share prices can be over or undervalued by the market. That means that even a small company with low share prices can be valued at high prices, depending on the type and quality of service they are providing. 

Market Cap as an Investment Metric 

Market capitalization can be an important factor when you are putting together an investment portfolio. It is generally a good idea to invest in different-sized companies to diversify your investments and mitigate the risks of the stock market.

Company size is often measured in market capitalization. The market cap of a company can help you understand what to expect from your investment and make investment decisions that are in line with your expectations. Companies can be categorized as micro-cap, small-cap, mid-cap, large-cap, and mega-cap according to the size of their market caps.

As a general rule of thumb, large companies are more stable than others because they have managed to increase their market value in a competitive system. If they have been around for a while, it is because these companies have managed to survive the harsh conditions of the market economy, such as economic crises and downturns. However, as stable as they are, large companies may have trouble expanding their operations and increasing their profitability. Large companies also tend to have more expensive share prices than smaller companies, so the entrance threshold could be higher for investors.

Smaller companies may not be as stable as large companies but that also means they have a lot of potential. Of course, you never know whether a small company is going to become the next Amazon or crash and burn, leaving you with worthless shares. There is an inherent risk in investing in smaller companies but that shouldn’t stop you from buying stocks especially if you think the company has a viable business plan and a solid product. Some companies with smaller market caps offer services and products for niche markets and can be valuable in the long run. The nice thing about investing in small companies is that their shares are often cheaper and there is a good chance of making a profit from your shares if the company does well.

Let’s look at what you can expect to gain from investing in different-sized companies.

What Do You Gain From Investing In Different-Sized Companies?

Investments into different sized companies help you diversify your portfolio. Investing across companies with different market caps can help you mitigate risks and turn profits. 

Industry behemoths like Amazon, Apple, Google, Microsoft, and Nvidia are all mega-cap stocks. Their market caps are above $200 billion. They are usually considered safe investments. However, since the stocks are already quite expensive, it may be hard to make a profit from these stock shares.

Large-cap companies have market caps of over 10 billion dollars. They usually have the highest trading liquidity and they are considered core long-term investments. Large-cap stocks provide the best dividends. Shareholders can receive regular dividend payments from company profits. Besides, you never know when a large-cap company will come up with a product that will jump its market cap to mega cap.

Mid-cap companies are good choices if you are looking to expand your options. These companies can grow and expand, as they have growth potential.

Small-cap companies may be brand new or they might be pioneers in new industries and niche markets. These are considered risky investments because they have smaller resources that could leave them at a disadvantage in case of an economic downturn. Small-cap stock prices are cheaper but also more volatile than others. If their growth potential is high, you can expect high profits. There are also micro-cap companies, but since they are not tracked by major exchanges, i̇t i̇s i̇mportant to make extensive research before investing in micro-cap stocks.

Cryptocurrency Market Capitalization

In the traditional stock market, market cap refers to the total market value of a company, based on the number of companies’ outstanding shares and stock price. In the world of digital assets, crypto market capitalization refers to the total value of a digital currency. The market cap of a crypto asset is calculated on the basis of the number of mined crypto coins and the price of a single unit of that cryptocurrency.

Let’s use Bitcoin as an example. There are some 18 billion bitcoins in circulation. If we multiply the number of Bitcoin in circulation with the current Bitcoin price, we find the current market cap for Bitcoin.

The same goes for Ethereum, Litecoin, Bitcoin Cash, or any other crypto asset. Market capitalization for all these cryptocurrencies can be calculated with this method. Bitcoin has the largest market cap out of all other crypto assets, mainly because of its price. There are far more ETH tokens on the market than BTC, but Bitcoin prices are way higher, leading to a higher market cap overall.

However, it is important to know that the market cap isn’t a very good metric for planning a cryptocurrency investment strategy. In the stock market, a company’s market capitalization can help an investor to classify their investments as large-cap, small-cap, or mid-cap stocks and diversify risks and profits.

But since cryptocurrency is a new market, the same categories don’t quite apply here. While there are also large-cap and small-cap crypto assets, these categorizations play a small role when it comes to making sound investments.

What Does the Crypto Market Cap Mean for Investors?

With crypto assets, market capitalization is a far less important metric to consider when you are making investment decisions. The cryptocurrency market is inherently different from the stock market. While it is worthwhile to check the market cap of a digital asset that you are looking to buy, you should definitely consider other metrics, such as reputation and security, before making a decision.

That said, you can benefit from using a weighted market cap strategy when you are investing in crypto assets. A weighted market cap strategy involves buying digital assets proportional to their market caps. So, if a digital asset, let’s say x coin, has a market cap of 1 million, and the y coin has a market cap of 4 million, you invest more in y coin. If you have $100 dollars, you buy 80 dollars worth of Y coin and 20 dollars worth of x coin.

With this strategy, the majority of your investment would be in Bitcoin because it has the highest market cap, but you can still invest in altcoins without risking much. Of course, half the fun in the crypto game is finding that specific altcoin you think is going to reach the moon and taking advantage of its low prices, but for the more conservative crypto investor, the weighted market cap can be a good investment strategy.

Cryptocurrency prices are volatile, and that means the market caps of digital assets can shift significantly over short periods of time. Crypto traders can take advantage of this volatility to make short-term investments of assets that they plan to liquidate after the prices rise. But that can be a risky strategy, especially if you are playing with big numbers.

Cryptocurrency Market Cap Categories

Just like there are large-cap and small-cap companies in the stock trade, there are large-cap and small-cap cryptocurrencies in the world of digital assets. Large-cap crypto assets tend to be more well known and mainstream than small-cap cryptocurrencies, but that can change overnight given the current state of the crypto market. 

The good news about a cryptocurrency or praises from an influencer or an industry leader can increase the price of a cryptocurrency and its market cap in a short time. Of course, the same goes for the opposite. When Elon Musk tweeted about Bitcoin’s negative impact on the environment and announced Tesla would stop accepting Bitcoin, the price of the currency fell, leading some Bitcoin owners to loudly denounce him at a Bitcoin conference in Miami.

That is the major difference between traditional companies and cryptocurrencies. Even Bitcoin, the biggest crypto asset on the market with the largest crypto market cap, is inclined to high price fluctuations when faced with the opinion of one person, albeit one with a very large community following. However, there are millions of market participants in the cryptocurrency markets, and the fact that anyone with a large platform can cause such volatility is a bit problematic in that respect. Elon Musk can denounce Apple or Microsoft on Twitter, but that would hardly cause a large sell off.

An influencer with a large enough platform can sometimes make or break a cryptocurrency. Dogecoin prices rose sharply after Elon Musk’s endorsement in 2019 and the so-called joke coin now has a market cap of over 30 million dollars, one of the highest in the cryptocurrency economy.

With all this in mind, let’s look at how some of the internet’s favourite crypto assets rank in market caps, and see what each market cap category includes.

Large-Cap Cryptocurrencies

Out of thousands of cryptocurrencies, there are around 20 cryptocurrencies that have market caps of over 10 billion dollars. Alongside old favorites like Bitcoin, Ethereum, Litecoin, Bitcoin Cash, and Ripple, you can see Dogecoin, Solana, Polkadot, and Cardano on the list.

You can generally find these crypto assets on many different crypto exchanges, as they are quite popular. They have higher liquidity compared to less known digital currencies, though that might change from one exchange to the other. The high trading volume indicates that these crypto assets are frequently bought and sold on the crypto market. You are unlikely to have any trouble buying or selling them.

Mid-Cap Cryptocurrencies

There are more than 80 mid-cap cryptocurrencies listed on the CoinMarketCap site. Mid-cap cryptocurrencies have market caps of over 1 billion dollars. These are developing crypto assets and they are generally more volatile. The trouble with mid-cap coins is that they offer potential but it is very hard to tell whether they will rise to it. The success of many cryptos depends on developing a service or technology that will be useful for the crypto industry in the future (for example, the OMG Network) but doesn’t have any products on the market yet. Some others are utility tokens without any use cases. In the end, it is very hard to gauge whether these crypto assets will protect and grow their value in the long run.

If you are considering investing in mid-cap cryptocurrencies, as always – make sure you do your research and the company behind the cryptocurrency has a viable business plan and a solid product that they have finished or are close to finishing. Some of these mid-cap crypto assets have been around for years and while their values have increased, it is hard to say whether they will remain in the market for the next five to ten years. If you are looking to make profits from day trading, mid-cap cryptocurrencies can be a good option but you should still make sure it is not a pump and dump scheme or a scam by doing your research.

Small-Cap Cryptocurrencies

There are hundreds of small-cap cryptocurrencies on the market. These assets are even more volatile than others, but they are good for day trading. However, if you aren’t a professional trader or if you don’t have access to professional trading tools, it might be hard to track the market prices continuously with these assets. Fortunately, many exchange platforms provide tools that help you automate your trades. Of course, there may also be good long-term investments, but you should only make a long-term investment if you are sure that the asset is a safe investment.

The nice thing about small and micro cap cryptocurrencies is that you can buy coins for cheap prices and sell them if their prices increase. These are like penny stocks in a way: you don’t know if they will be worth anything in the future, and most of them probably won’t, but one or two good investments can help you make a solid profit overall.

However, because the crypto industry is largely unregulated and there isn’t much independent reporting about cryptocurrencies in general, it is very hard to find out more about these cryptocurrencies other than the claims made by the company behind them. That is a huge security risk because you might end up with nothing in your hands. Con artists and fraudsters often think crypto is heaven-made for them, and they aren’t wrong.

Should You Take Market Cap Into Consideration When You Are Making Crypto Investments?

Market cap is a dangerous metric to use when you are buying cryptocurrencies. Cryptocurrency is a growing market and that means people are flocking to the market and buying crypto assets without knowing what they are buying when it comes to most crypto assets. Whi̇le cryptocurrenci̇es li̇ke Ether and Bitcoin have been around for years and have managed to solidify their value and long-term agendas, many others are just experiments at best. That means that even a crypto asset with a large market cap may end up being worthless in a couple of years or months.

Ladder leaning on clear jar filled with money with plant growing on top on light green background

When you are making digital asset investments, you should carefully research what you are investing in. So look into the company and the team who are building and marketing the project, whether they are regulated or audited by any authorities, and what they are promising in general. If the promise sounds too good to be true, then it probably isn’t true.

A Few Words Before You Go…

In the regular stock market, market capitalization refers to the total value of a company at a given time. You can track the market cap through charts to see whether the company share prices are increasing or decreasing. The stock market is regulated in order to prevent insider trading, something that can cause large price upheavals.

When it comes to cryptocurrencies, market cap is a poor metric for deciding the actual value of the asset and whether you should invest in it. Cryptocurrencies are not regulated the same way other assets are, and that means that the entire market is full of scams. The market cap of a crypto asset can rise and fall within minutes, mostly due to pump and dump schemes. And lastly, keep in mind that crypto markets are generally fragile compared to traditional stock markets because individuals with large platforms can influence the market easily.


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