What Is Market Cap? Why Does It Matter?

When navigating any market, be it crypto or stocks, there are a handful of foundation concepts EVERYONE should be familiar with; one of the most important is market capitalization. Unfortunately, those new to markets often misconstrue the relationship between an asset’s price and its value, or market cap.

In 2021, newcomers to crypto were inundated with the claim of DOGE, SHIB, and other “meme coins” heading to $1.00. Being a fraction of a penny, many believed such to be inevitable. Unbeknown to them, the promise their favorite dog coin going to $1.00 and subsequently securing their early retirement wasn’t as realistic as they were told. Why? One simple word, market cap.

In this post, we will walk you through what market capitalization is, how to calculate it, and why it is crucial to understanding the actual value of an asset.


What Is Market Cap?

Market capitalization, also known as “market cap,” is the total value of an asset. It is calculated by taking the current price and multiplying it by the asset’s circulating supply. For example, if one bitcoin is worth $40,000 and there are 19M bitcoins in circulation, we can get bitcoin’s total value (market cap) multiplying $40,000 by 19M bitcoins. Doing so, we get a market cap of $760B.


Why Does Market Cap Matter?

Market cap is a measurement of the total value in a publically traded market. Amongst all else, market cap can lend insight into what a group of buyers and sellers believe the asset to be worth at any given moment. It also serves as a useful measuring stick to compare the value of one asset against another.

Consider that one share of Google is $2600 and one share of Apple is $167. If you compare these two stocks against one another purely by looking at their share price, one might incorrectly argue that Google is worth more than Apple. Even worse, they may say that Apple is “cheap.” However, when factoring in the price of each stock and how many shares exist, they will find that Apple has a much larger market capitalization and is thus worth more.


“Wen $1?”

As previously mentioned, valuing an asset based on its price can be misleading and does not reflect its true value. But unfortunately, many people continue to make this mistake. Even worse, some intentionally take advantage of the uninformed to promise them a cryptoasset “mooning” overnight.

Let’s take a look at DOGE, SHIB, and SAMO. If we stack these cryptoassets side-by-side, we’ll see some fundamental differences in each coin’s ability to reach the all-too-promised price of $1.

Starting with SAMO, the current circulating supply, or all coins available to market participants, is 3.25B SAMO. This compares to DOGE and SHIB’s circulating supply of 133B DOGE and 549T SHIB, respectively. To get the market cap of each dog coin, we multiple these figures by their current price.


Market Cap:

3.25B SAMO x $0.02 = $65M

133B DOGE x $0.12235 = $16.4B

549T SHIB x $0.00002365 = $13B


Here we can see that the market cap of SAMO is a fraction of DOGE and SHIB. Not only that, but we can see that despite the difference in the price between DOGE and SHIB, they do not differ substantially in market cap.

Taking things one step further, we can calculate the market cap each dog coin would have at $1 each.


Implied Market Cap at $1.00 Per Coin:

3.25B SAMO x $1 = $3.25B

133B DOGE x $1 = $133B

549T SHIB x $1 = $549T


Even at $1 SAMO, the market cap remains a fraction of DOGE and SHIB’s current market cap. However, a $1 DOGE equates to a market cap larger than global payment processor PayPal. With the Global Equity Market valued at $125T, a $1 SHIB would mean that its market cap is 4.3 times greater than all public stocks in existence. Needless to say, it’s imperative to consider an asset’s market cap when making any decisions based on the expectation of a certain price level being reached.


Fully Diluted Market Cap

As applicable as considering an asset’s market cap may be, it doesn’t always account for the total number of coins that will exist. This is because the market cap only accounts for circulating supply or the number of coins that are currently available. If we wanted to factor in the number of coins that will ever exist (maximum supply), we could turn to the fully diluted market cap.

Staying with our dog coin example, we’ll find that DOGE currently has an unlimited supply. That is to say, new DOGE is mined every day and will continue to be mined for eternity. So with each passing day, it becomes increasingly more difficult for DOGE to hit $1. Meanwhile, SHIB’s max supply is 590T, and SAMO’s max supply is 4.75B.

Fully Diluted Market Cap:

4.7B SAMO x $0.20 = $94M

133B DOGE x $0.12235 = $16.4B

590T SHIB x $0.00002365 = $14B

Note that because new DOGE is mined daily, the fully diluted market cap will always equate to market cap. But for SAMO and SHIB, there will be a difference between market cap and fully diluted market cap until all their coins enter circulation. Though these figures are not materially different compared to market cap, they can be for other cryptoassets.

For this reason, it’s also worthwhile to consider how a cryptoasset’s market cap compares to its fully diluted market cap and said difference. Though not always, the greater the difference, the greater the potential downward pressure an asset can experience as new supply enters the market.


Conclusion

As you can see, price is not EVERYTHING. Also, you should now see how failing to understand the importance of an asset’s market cap can lead some to believe outlandish claims. So the next time you research an asset and base your decision on price hitting a particular level, such as $1.00, consider the asset’s market cap, circulating supply, and max supply before deciding whether or not a price target is realistic.

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