Mathematically, market cap is calculated by multiplying the value of a currency (or stock) by the number of units in circulation.
Example:
I have created a new BlondeAndTech token. I want to give it exclusively for my friends. So I issued 10 tokens only. Each token is worth 1$. What is the market cap if my token?
If you said 10$ you were correct 😉
So when we know how to calculate it, but how can we use it?
What does market cap mean to us?
Practically market cap represents the total value of a project (or company).
Market cap is more important than the price of a single token.
Think of your tokens (or shares) as a percentage of the entire project. Imagine this scenario:
There are only 2 tokens in circulation. If another 2 new tokens are issued, the original tokens lose 50% of their value. However, the total value of the project remains the same—it’s just divided by 4 instead of 2.
When the market cap is large, a significant number of new tokens must be issued to meaningfully impact the value of a single token.
Let’s go back to BlonceAndTech token. By the way, I think I really should create my token. Maybe I could do a post about that once it’s issued 😊👱♀️
Imagine that I went to the music festival where I made 10 more friends. I have spent such a great time with them that I wanted to give them something to remind them of me and of all these good moments spent together. So I issued 10 more tokens!!!
If the market cap remains unchainged… and it does because I didn’t do anything to improve it.. what is the value of a single token now? Before the music festival it was 1$.
Yes, you are right. It’s 0.5$ now. Well.. I have to say that my friends that didn’t go to the festival with me are not very happy. Because of me meeting new friends the have lost 50% what I have given them… What can I say.. If they I real friends they will forgive me.
I hope that now you get the idea of the market cap.
To wrap up:
Why Does Market Cap Matter?
- Indicates Stability: Larger market cap assets (like Bitcoin or Ethereum) tend to be more stable and less prone to manipulation.
- Measures Risk: Smaller market cap coins are often riskier and more volatile, making them easier targets for “whales” to manipulate.
- Shows Market Size: It helps traders understand the overall size and dominance of a cryptocurrency within the market.