The cryptocurrency industry is home to all kinds of tokens that are constantly vying for investor interest. It’s a volatile environment where prices are constantly on the move. Essentially, this means a project at the forefront of the market at a certain time may not necessarily hold that position for very long. Due to this, it’s important for traders to understand the metrics used to measure a token’s success so they can stay on top of movements and possibly steer clear of some risks that come with investing in a turbulent market.
The term market capitalization (market cap) is generally used to describe the complete dollar market value of a company, project, or asset class. In a traditional company, the market cap would entail the total valuation of the company’s outstanding shares of stock. For cryptocurrencies, market capitalization is the total value of a cryptocurrency's circulating supply multiplied by its current price. Let’s use Bitcoin to illustrate, Coinmarketcap lists 19.46M BTC in circulation at the moment, at $29,198 per token. That makes for a total market cap of $613.4B.
To start with, the market cap of a cryptocurrency is a fair representation of how much it is worth. Market capitalization provides investors with a straightforward way to gauge a project’s scale in the market. It takes the token’s price into account as well as the extent of its adoption. This makes it a key metric when comparing cryptocurrencies, especially in terms of sheer size.
Market capitalization also provides investors with a glimpse into a token’s potential for growth and stability. Changes in a cryptocurrency's market cap over time can reveal its performance trajectory. Rapid increases or decreases in the market cap may signify periods of growth or decline, respectively.
Additionally, cryptocurrencies with higher market caps tend to have higher liquidity. This makes it really easy to buy and sell the token in large quantities without a major impact on the price. Higher liquidity contributes to price stability, minimizing the effects of unexpected swings.
It’s also worth noting that a token’s market cap often correlates with its rank within the crypto ecosystem. Due to this, as a metric, this figure influences investor perception and sentiment.
Suply deals with the number of available units or coins of a cryptocurrency that are present in or could potentially enter the market. It is an important metric because of how it factors in when it comes to a cryptocurrency's value, scarcity, and market dynamics. However, there are different kinds of supply in the crypto industry, so here’s a breakdown of each one and how it works;
This refers to the total number of units of a cryptocurrency that are in the market at a given time and are available for public buying, selling, and general transactions. Circulating supply does not include tokens that are held by the project's team, or locked in smart contracts. It’s a key value when it comes to calculating market cap. However, considering the existence of confiscated tokens or those held in accessible wallets, not everyone agrees on the validity of the market cap. A separate metric, the “realized market cap” attempts to tackle this by only taking coins with recent movement into account.
A cryptocurrency’s total supply refers to the number of tokens that exist on the blockchain. This includes the coins in circulation as well as those that have been minted but not yet released into the market. Note that the total supply does not consider coins that have been burnt.
Maximum supply refers to the total number of units of a particular cryptocurrency that can ever exist. Different projects have different maximum supply limits while some do not have limits at all. Bitcoin for instance is capped at 21 million coins, Ethereum on the other hand does not have a predetermined limit, hence its supply is constantly on the rise.
A cryptocurrency’s volume or trading volume refers to how much of that token is traded throughout the market within a certain period; typically a single day. You can look at crypto trading volume as a way to keep track of how much of a cryptocurrency has passed between traders.
Liquidity describes how easily an asset can be bought or sold without causing dramatic changes in its price. A consistently high trading volume in a cryptocurrency usually points to higher liquidity which means fewer fluctuations and a more stable market value. Think of it this way, because there are more transactions going on, a single trade is less likely to have a major impact on the overall market price.
Traders can use a cryptocurrency’s trading volume to make sense of and validate ongoing market trends. Here are some examples of how that works: if a coin on an uptrend or downtrend had a high trading volume, that volume could be seen as confirmation of that trend - that is an indicator of its strength. A situation like that only with a lower trading volume would point to a weak trend.
In the case of a combination of a high trading volume and an increase in price, it suggests that there’s a lot of demand for the asset and a sort of market consensus that makes the price surge likely to continue. A high volume plus a price decline, however, points to a lot of selling but not a lot of buying.
The relationship between trading volume and market sentiment is worth observing as it provides important insight into investor behavior and possible market movements. A surge in the trading volume during a market rally signals positive sentiment that is, a belief among participants that a trend might hold. Conversely, when trading volume spikes during a decline, this points to a sell-off revealing low confidence among traders and a potential further downturn. Basically, monitoring trading volume can help you decipher the underlying emotions in the market, guiding predictions of market direction.
A price reversal takes place when an ongoing trend in the price of a cryptocurrency - perhaps an upsurge changes direction that is, it turns into a decline. No doubt, this can be troublesome for investors, however, changes in the token’s trading volume can alert traders to potential reversals. An uptrend with declining trading volume might indicate weakening buyer interest and a potential reversal, while a downtrend with decreasing trading volume could signal that selling pressure is diminishing, allowing traders to act accordingly.
When it comes to accumulation, however, an unexpected spike in trading volume while the price remains relatively stable is worth noting. It suggests that traders, especially the wealthier market participants are quietly accumulating assets without causing immediate price fluctuations. Price surges usually follow periods of accumulation but trading volumes enable other users to predict such movements.
Coins with high trading volume are generally experiencing lots of market activity, this means that a lot of buyers and sellers are engaging with the token and an upsurge might be on the way. At the same time, however, a high trading volume can signal the start of a bear market or the height of it as widespread anxiety can trigger major sell-offs.
A cryptocurrency with a low trading volume may be experiencing a decrease in investor interest. In situations like this, liquidity usually drops as buyers and sellers conduct fewer traders and decrease in price usually follows. Assets with a low volume can be very volatile leaving them open to price manipulation as a small number of large trades can result in disproportionate price movements. Moreover, low-volume markets can disadvantage sellers, forcing them to lower prices below their initial purchase costs due to low demand.
A cryptocurrency’s market gives traders a snapshot of its worth at a certain time. Its max supply on the other hand refers to the most tokens a project will ever create.
Trading volume is the amount of a cryptocurrency traded in a specific time, indicating short-term activity. Market cap is the total value of a cryptocurrency, giving a broader view of its worth and size.
Table showing the top ten cryptocurrencies by market cap alongside their trading volume and circulating supply (Source: Coinmarketcap)
Navigating the ups and downs of the crypto market is often a challenge. However, with metrics such as the cryptocurrency market cap, supply, and volume, the journey can be a little easier on traders. These figures are not a silver bullet when it comes to providing direction, but they do help investors understand the nuances of the market and maximize its movements.
Are crypto market caps calculated with total supply or circulating supply?
Crypto market caps are generally calculated using circulating supply, which represents the tokens actively trading in the market.
What factors influence cryptocurrency market cap, supply, and volume?
Factors include demand, trading activity, token issuance mechanisms, adoption rates, and project fundamentals.
How does token supply impact a cryptocurrency's value?
Token supply influences scarcity; lower supply can lead to higher perceived value. Projects with controlled supply mechanisms may attract investor interest.