I have seen a lot of new money coming into the cryptocurrency scene lately. Inevitably, these new people make mistakes, and instead of making fun of them or preying on them, let's grow the community by educating them. I'm going to try to make this a recurring series with different lessons, but what I would like to focus on for this post is market capitalization.
What is market capitalization? When it comes to the stock market, capitalization is defined as "the value of a company that is traded on the stock market, calculated by multiplying the total number of shares by the present share price." When it comes to cryptocurrency, the "shares" are the coins or tokens, and the "company" is the platform, asset, or currency.
That's a cool definition and all, but I think we need a real-world example to properly demonstrate. Let's do it with Bitcoin:
A single Bitcoin is worth $2379.90 and there are about 16.5 million bitcoins in circulation. So $2379.90 x 16,500,000 = ~$40 billion. So $40 billion is the current market cap of Bitcoin. If you play with the numbers, you may start to realize that a bigger market cap would equal more value per Bitcoin. This is very important, and the whole point of this post. So for Bitcoin to double in price, the market cap would have to rise to $80 billion.
With this knowledge, you can now understand the fallacy of crypto n0obs only looking at the price for each coin. Many fresh traders look at Ripple (XRP) and see a coin for 20 cents and think, "I can have 10 coins for $2 instead of some small fraction of a Bitcoin/Litecoin/Ethereum... Once those coins get to $1 each, that's a 500% return on my investment!!!" The only problem with this is that there are 38 billion Ripple in circulation, and the market cap is close to $8 billion. So for that 20 cents to go up to $1, $40 billion more would have to flow in... Not that likely, at least in the short term.
I'm not picking on Ripple specifically, it's just the first good example in the top currencies. Just because an individual coin is cheap, doesn't mean it's going to increase dramatically in value. If it has a huge market cap, ask yourself if you can see it doubling, and if so, in what timeframe. Timeframe is important because all of crypto is going to grow as it reaches more mainstream adoption. When the total market capitalization of all of crypto grows, most of it usually goes into the top 5-10 coins, increasing their individual value.
In conclusion, if you can find a crypto with a good use case and a very low market cap, you can get 10X-100X your returns if you get in on something early that:
- Has a low market cap
- Actually has a use case and will grow
- Isn't a scam
Finding a cryptocurrency that fits these criteria isn't easy, and it's almost always a gamble. There are plenty of scam cryptocurrencies that have low market caps because every time someone buys in, the developers cash out. I'll give an example of one of my own "diamonds in the rough." I only put in 1% of my portfolio, and it's high risk:
Seeing how the market cap is $272k, it can easily 10X to $2.7 million and still not even be in the top 100. 100X would put it at $27 million, which would put it at #80 or so right now, which is less likely, but still possible if they achieve their stated goals. While I am invested in this one, it is only meant to be an example, so I'm going to stop talking about it and let you research for yourself if it's something your interested in.
Next week, I think I'm going to do a brief article about how to use coinmarketcap.com and all of it's features and what they mean. Please follow/like/subscribe if you would like to see more content like this. And drop me a line to let me know what you thought about this article. Thanks for reading!