Why is Market Cap Important in Crypto?

For hardcore crypto numismatists, they sure do know coin market caps inside out like the back of their hand. But for everyday people who happen to trade crypto and are not so adept at it, sometimes we simply can't help but wonder, WHAT THE HECK is a market cap? Why is market cap so important? What does it do to my coins?

- So, what is market cap? How is it calculated?

For starters, it ain't a cap you bought to support your favorite football team called "Market", although it's not entirely awful to shout out "Go Marketers!", which sounds more like a morning pep talk in a marketing office instead of a locker room.

It is, actually, an acronym for capitalization. So the term is now sort of self-explanatory if you know a little bit something about basic economics. It is the total market value of an item, and in crypto, it refers to all the coins that have been mined. To work out the market cap of a certain coin, you multiply the current market price of a single coin by the number of coins in circulation.

MARKET CAP = UNIT PRICE x TOTAL NUMBER IN CIRCULATION

Here we have a table showing the market caps of major cryptocurrencies (up until Mar 15 2022)

Source: CoinMarketCap

* Market cap changes frequently, the table above does not constitute any reliable source of information for your investment decision-making.

- Why is market cap important in crypto?

Those who bought bitcoins ten years ago must be laughing their asses off when the token went up like crazy these years. See, when you had a great bargain hunt and the price goes up, that's awesome. But volatility can be a bitch when the price free falls like a PUBG player.

Market cap is like an indicator, it tells you if a coin is more likely to remain stable or the other way around. With greater market cap, it's like you are putting on more weight, and physics tells us that it tends to become more stabilized. But for digital assets with smaller market cap, they are more sensitive when market zigzags, and sometimes that means catastrophic losses.

- How does market cap affect coin price?

So you can see, market cap presents you with a bigger picture. The price, of course, matters, but market cap is what shows you the potential of your digital investment.

To put it simple: The greater it is, the safer your investment will be, statistically, of course.

Here's an example, think of it as cars, alright? Say I have a 1967 Shelby Mustang GT 500 (O Mighty Lord if that were only true), that sweet baby is gonna cost a fortune though, if something falls apart from her, because that model is rare in the market, which means smaller "market cap". But for a Toyato Camry, you know you'll find parts even in the warehouse of an auto shop in the most remote town sitting in the middle of nowhere of Arizona.

- How should I make market cap useful?

For a lot of investors, including stock traders, they divide market cap into three different levels, which are large-, middle- and small-cap. But market cap as an indicator, actually has a limited scope of application in crypto than it does in stocks. But if you adopt a weighted market cap strategy, sometimes it works for you.

A weighted market cap approach entails investing a proportionate amount in each asset depending on its market cap. For example, as the table above shows, BTC has a cap around $740 b while ETH is somewhere near $310 b. You split the two by how much they each account for:

BTC accounts for 70%;

ETH accounts for 30%.

So the idea here is, put 70% of your budget in bitcoin and the rest in ethereum.

- Conclusion

Market cap is actually a very simple idea, and we know how cryptocurrencies can have price changes in a dramatic way, which means market cap is always going through changes. It matters, but not as much as a wise investment strategy and a good attitude.