Why you should always consider market cap when investing in cryptocurrency

Market cap of a given cryptocurrency can sometimes be a more important indicator to gauge growth than the price of the cryptocurrency. In other words, it can be hard to tell the overall value and growth of a given cryptocurrency by using only the price of one coin for a given cryptocurrency. Market capitalization, which means the combined value of all coins of a given cryptocurrency (total coins multiplied by price of one coin), will be a more accurate indicator of the size of cryptocurrency and possibly its future trends because a company or cryptocurrency could have a high price per share but have a low market capitalization compared to other companies.

Tells how much fiat is invested in the project

Currently, Bitcoin, Ethereum, XRP, and Bitcoin Cash are the only cryptocurrencies managing a market cap of higher than $10 billion which is traditionally considered a high market cap; in traditional markets, the higher the market capitalization the more the profitability and reliability of a given stock. Further, market capitalization is a good indicator of how much fiat is invested in the cryptocurrency in question. 

For instance, although Ripple is currently trading at under $0.45 for each token, it has the third largest market capitalization (over $18 billion), which tells you that a lot of fiat is invested in the cryptocurrency than the likes of EOS with a market cap of around $7.5 billion but trading at more than $8.4 per coin or Monero XMR, which is trading at $140 per coin and has a market cap of slightly more than $2 billion.

Tells which crypto has more potential to gain in price 

For instance, you might be tempted to look at a coin with a price of $0.10 or $0.05 and think it is highly likely that its price will triple or rise by say 10 times. That COULD be a huge mistake if that fact is not supported by the numbers of the circulating supply. Coins with lesser circulating supply at current times have a higher likelihood of price rise than those with a higher circulating supply.

For instance, Litecoin currently has a price of $87 and a circulating supply of 57 million while Ripple XRP has a price of $0.45 and a circulating supply of $39 billion. Looking at the prices, someone might poorly estimate that the price of XRP has more potential to double or triple or increase several times than that of Litecoin because Litecoin has a much higher price than XRP. In fact, someone might wrongly assume that since XRP is as cheaper, it is likely to rise in future more than Litecoin. These are common mistake made by many people investing in cryptocurrencies.

However, comparing the two, Litecoin, given its low supply, has a much more likelihood to increase price several times than XRP. Litecoin price will need to rise several times in order to reach the same market cap as the Ripple's. Therefore, the market cap might tell a much more better story in regard to price and growth potential than price of a single cryptocurrency.

In addition, it is worthy looking at the total supply vis a vis the current supply of a given cryptocurrency. Higher supply of anything will likely lead to lower prices if demand remains the same, according to economic theory.

Tells more about the supply story and growth potential

Although many people gauge cryptocurrencies by looking at their individual coin prices because these people are trading for profits, prices between cryptocurrencies aren't comparable because each of the cryptocurrencies will have different supply. This supply is what affects prices. In fact, price of a cryptocurrency should become a relevant factor only after considering the total supply of that cryptocurrency, if you are thinking about buying and holding for instance. Although it does not hold for coins like Bitcoin, it is true for majority of the coins that it is much harder for a coin with a larger market cap to increase in value than a smaller coin.

However, market capitalization is only an indicator of the current demand -- the amount of people who are buying or bidding the price -- but does not tell about the future trends. However, many people believe it as a measure of how strong an asset is.

It is a measure of project risk

Market cap is also a measure of the risks a cryptocurrency might face on its way up. According to financial theory, a cryptocurrency with large market capitalization will have slower growth rate and hence lesser risks than newly issued tokens because it is already tested in the markets. Recently issued digital tokens have a higher probability of tremendous increase in prices and faster growth but increased risks as they are not tested by time.

In that case, Bitcoin, which has the largest market capitalization compared to all other cryptocurrencies is considered less risky investment. In fact, the larger and lesser risky a cryptocurrency is, the higher likelihood of more people coming in and investing in it because of the "there are many more people already in it and therefore it is likely to succeed" kind of notion. Many people are risk averse and like entering into what has already been tested. Nevertheless, the tricky thing is that the higher the price becomes as the supply increases, the slower growth the future looks for any asset.

Indicates which project is more susceptible to internal manipulation

When it comes to the likelihood of changing of prices irregularly and volatility, although all cryptocurrencies are volatile and easy to be manipulated by their whales and traders, coins with lower market caps are more susceptible to this kind of manipulation than bigger coins with higher market cap. This is also because lack of trading volumes in the market makes it possible for those with a very large number of coins to manipulate prices whenever they engage in trading. On the contrary, it is harder to manipulate coins such as Bitcoin as a lone trader because you will have to trade a huge amount of coins to affect the market.

The large coins with a large market cap also happens to have a huge community that is always taking trading positions and activity and this makes it harder even for whales to manipulate prices than would on smaller coins with low market caps.

That does not mean that the market cap is the only factor you should look when evaluating an investment decision. There is a host of other factors to consider.

Low market cap coins can also earn you good profits, but when?

As we said, coins with a higher market capitalization are already tested by market pressures and even time, are trusted, lesser risky, and have a lesser likelihood of exiting compared to new tokens with low market capitalization. However, that does not mean low market cap coins are a no go zone and that higher market cap coins will always make you highest profits. In fact, many investors and traders earn profits from tokens coming from ICOs and very low prices and low market capitalization. But not every coin will manage; many will not.

If you are thinking of investing in low market cap coins, here is how to understand if they might have potential for growth and price increases. Look at the potential value as backed by ideas: reading at the ideas for each cryptocurrencies that you think have potential, it should not always be hard to guess whether those ideas are likely to drive huge potential or not. For instance, it could be penetrating large markets such as remittances with a huge promise and technology to help reduce costs, increasing efficiency of supplies etc.

Potential of teams: coins with more experienced teams in the area they are venturing have a higher potential than those that do not have. Coins with teams experienced in the cryptocurrency industry also have more potential to grow. There is a lot more to evaluating a low market cap coin with a potential and there are more points on that here.

David Kariuki

David Kariuki likes to regard himself as a freelance tech journalist who has written and writes widely about a variety of tech issues that affect our society daily, including cryptocurrencies (see cryptomorrow.com and coinpedia.org); climate change (cleanleap.com), OpenSim and virtual reality (see hypergridbusiness.com). He is currently pursuing a MSc in Environmental Management at Open University. He does write here not to offer any investment advise but with the intention of informing audience, and articles in here are of his own opinion. Anyone willing to use any opinion here as advise to invest in crypto should obviously take own responsibility and accountability of their losses (or benefits) thereof. You can reach me at eqariu@gmail.com or david@cryptomorrow.com