Over the past decade, Bitcoin (BTC) has proven itself to be a worthwhile investment for a lot of people. However, beginner traders are often advised by some to use traditional investment techniques.
What some fail to consider is how these strategies have to be adjusted for the Bitcoin market, as we’ll see with market capitalization.
The basics of market capitalization
The definition of market capitalization in traditional financing is the total value of a company’s outstanding shares. This means it describes the worth of a company by combining the value of each individual share with the total number of shares in circulation.
What is market capitalization in cryptocurrency?
To translate this idea into cryptocurrency, specifically the Bitcoin market, we simply have to replace the word company with BTC. This time around, market capitalization describes the total value of Bitcoin in the crypto market. Still pretty similar, right?
That value changes depending on how well-accepted or established Bitcoin is. Bitcoin’s market cap, as of March 24, 2022, is valued at $818,218,999,274 USD. The fact that it’s so high should be of no surprise to anyone, seeing as it’s the first of its kind. Plus, the fact that 18,925,000 BTC has been mined (as of March 24, 2022) out of the total 21,000,000 shows us the availability of the currency.
How is Bitcoin’s market cap determined?
Market capitalization is determined by using a formula. At this point, you might be worried that this will only complicate things further for you—fortunately, it’s pretty simple. The market capitalization formula for Bitcoin is as follows:
Price of coin x number of coins in circulation
The resulting value gives you the market cap of BTC. Since Bitcoin is meant to be a public, decentralized currency, you should find no trouble with getting the information above.
It’s a simple formula, but one that’s important for Bitcoin enthusiasts. With this, users can easily observe and determine the market value of a specific coin, something that can help influence investment decisions.
Why do you need to know the market cap of BTC?
It’s no secret that Bitcoin is meant to be more than just an investment tool. Despite that, it’s still pretty common to hear about “Bitcoin investments” and the like, only because it’s a great way to earn money.
In the traditional stock market, a market cap could be used to categorize possible investments (e.g., small-cap, mid-cap, large-cap). Investors can take advantage of this information by diversifying their investments over the different categories, allowing them to make the most of their time and money.
This is where the similarities between traditional and Bitcoin market caps end. With digital currencies, the significance is a little different because cryptocurrencies like Bitcoin are still in their infancy. This makes it difficult to make very accurate predictions, thus giving a coin’s market cap less weight in the final decision.
While it may not be an accurate predictor, knowing the market cap can show traders the potential of a coin in terms of value over time. For example, large-cap coins like BTC are considered safe investments, often seen as a conservative strategy. Mid-cap coins, on the other hand, do show a little more risk but with the possibility of greater growth.
Applying market cap knowledge for investments
As we mentioned before, Bitcoin is still too young to accurately predict. Unlike the stock market, where it might be a more accurate predictor of a stock’s value, market cap in the world of cryptocurrencies gives users an idea of how much risk or profit a user could expect.
This makes it perfect for users looking for investment opportunities but is unfamiliar with their options. By categorizing the available coins into different risk categories, traders can choose how to distribute their investment, maximizing their potential to earn a profit.
This method, typically called a weighted market cap strategy, involves distributing your investment in portions determined by the market cap of a coin. For example, if you’ll be buying both BTC and ETH, you can put more of your investment in BTC since this is a safer investment. The smaller portion, the one going to ETH, will retain its potential to earn you money but will also minimize the risk you face with a less-established coin.
All this is to say that a coin’s market cap is a useful tool to have, but not the only one you should completely rely on. The fact that cryptocurrencies are so new limits the effectiveness of knowing the market cap. Don’t let it decide for you, but don’t forget to take it into account.
Research before investing
The whole point of investing is to make a profit, and all these tools and formulas are simply ways to make the job a little easier for you. What’s most important when it comes to cryptocurrencies is doing your own research. It’s the best way to make sure you know what you’re getting into.
With cryptocurrencies, it’s all about giving yourself the advantage. Knowing how market capitalization works is just one of the steps you can take to ensure profitable investments. Knowing what to do with that knowledge is something you can only learn by keeping yourself up to date and starting your crypto trading once you’re ready.
*The content of this article is for informational purposes only; you should not construe any such information or other material as legal, tax, investment, financial, or other advice.You should carry out your own independent verification of facts and data and may want to seek professional advice before making any decisions.