Market capitalization in cryptocurrencies refers to the current total value of all the Tokens.
Market cap can be used as a investment strategy, designed to help pursue long-term financial goals.
In this article the IQEQ team will grow your understanding and the relationship between Token size, risk-reward ratio(return potential).
With this knowledge, you’ll be better prepared to build a balanced portfolio that compromises with the idea of market cap diversification.
Risk management strategy that mixes a wide variety of investments within a portfolio.
Using a mix of “market caps” in your portfolio, limits your exposure to any single asset risk.
Different types of assets in cryptocurrencies will, on average, yield higher long-term returns
And lower the risk of your holdings.
Market cap can easily be calculated by multiplying the price of a coin, by its total number of outstanding coins(Max Supply)
For example a coin, with 20 million coins as max supply, and a each coin selling at 1$ would have a market cap of $20 Million.
Market cap essentially allows investors to understand the relative size of one coin vs another. It measures what a coin is worth,
on the open market, as well as the market’s futuristic predictions and perception.
Free-float market cap & diluted market cap
Float is the number of diluted(outstanding coins) that are available for trading by the general public.
Using this method, you can calculate a more “fair” market cap, by excluding locked-in-coins (such as burned, locked into smart contracts)
This methodology has been adopted by most of the worlds major exchanges and listing sites.
Some projects decide to keep a certain % of the tokens out of the trading/general public, as its intended to be used for future Liquidity, for exchange listings and staking/farming.
These tokens are therefore not diluted into the Liquidity pair. As the project decide to dilute these tokens in the feature, it can eventually impact the coins market cap.
What more can impact market cap?
- Significant changes in price(either up or down)
- Number of coins minted(if new coins get minted, or undiluted/locked tokens circulates)
- Significant changes in the Liquidity pair (AMM) Formula (X*Y=K)
(X = Coin) (Y = Pair) = K (Constant price determination factor)
As price impacts market cap, any changes in Liquidity (adds/removals) impacts the market cap.
Listen to Changpeng Zhao the CEO of Binance
“Valuation without liquidity deosn’t mean much”
Build a portfolio with a proper mix of small-cap, mid-cap and large-cap coins, you’ll need to evaluate your individual financial goals, risk tolerance and time horizon(long or short?)
Nevertheless the knowledge from this article, the spark that might you get more interested into learning more, may help reduce investment risks, and support your pursuit of long-term financial goals.