Should you Invest in Cryptocurrency Based on Market Cap? What is Market Cap?

In one of our recent youtube videos, I said that the safest bet to play upon cryptocurrency for new investors is to invest in the top 10 coins based upon their market capitalisation. But is that always applicable to coins which are comparatively new? Well, Market Cap denotes the overall valuation of a cryptocurrency in terms of coin supply. Coins are ranked in terms of their net market cap just like we see in stock market and nifty index where top 50 companies get ranked according to the net market value of the company. In Cases, it’s more meaningful to look at rather than the price since it portrays a good insight into the asset’s net value.

Should we invest based on Market Cap Only?

Let’s assume we have a coin which has a total supply of 1 Billion Tokens. If the token has a circulation supply of 200 million tokens, each at a price of $0.1 then the net market cap of that token will be the product of the circulating supply and price per token.

eg, Net Market Cap ($200 million*0.1) = $20 million.

Now the main question is whether Market Cap is a good estimate or not, well it has a few drawbacks,

  • Assuming we have a token that’s not liquid and very few people actually have bought it. In this case, the market cap only denotes a picture of circulating supply’s total value at its current market price.
  • In the above case, a few trades only can have drastic changes on the market cap. This in turn can end up bringing a sharp spike or fall in price of the token and also may create price bubbles.
  • As more coins are mined, the market cap keeps increasing with more tokens around.

Relation of Price & Market Cap

Price of a token is trading value of a unit coin. It doesn’t reflect the real scarcity or value of an asset. Whether an asset or token is easily available or not greatly determines it’s overall demand. For Example, if we talk about Bitcoin, it’s net supply is capped at 21 million which makes each individual Bitcoin rare and scarce. The price keeps moving up just because of simple demand and supply. As more people want to buy a specific token, and fresh supply keeps falling short, the price keeps going up.

Just like the example above, a token with 1 million total supply will be scarce than a token with 1 billion total supply. But it doesn’t mean that the former would have a better chance of becoming the next Bitcoin in future. That’s also another story which we have discussed in another article talking about scams in cryptocurrency.

Conclusion

If you are buying cryptocurrency in India, then make sure you do proper research before investing in any token. Since, the market is not regulated yet, there are many scam projects with no fundamentals but are simple pump and dump schemes.

How To Trade Bitcoin in India

  • Download the WazirX app or visit the website. Then hit the Sign Up button
  • Fill in your email address (one that you use frequently), and your desired password
  • Click on the Terms of Service checkbox, but go through it once before checking
  • Then press the Sign Up button
  • You will be sent a verification email after hitting the sign-up button. If you have received it, click on Verify Email to complete the process.. If you haven’t, check your spam folder. Or hit Resend Here.

Lastly, if you want any more help regarding this, drop a comment and we will get back to you.

Thanks for Reading 🙌🏻

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