Understanding Market Caps & Coin Supply

by | Feb 21, 2018 | Education | 0 comments

Understanding Market Caps & Coin Supply

Understanding Market Caps & Coin Supply

It is very important to understand a crypto currencies market cap. This is one of the many tools we can use to help us determine if it is a good time to buy (or sell) a crypto currency.

Everybody is looking for the next Bitcoin. It seems we are on the search for another crypto which will crack the $10000 milestone naming Bitcoin King of the crypto-sphere.

For beginner traders entering the crypto market, it is a common mistake to mijudge a coins price as undervalued. For example, it is very common to look at the coins which are under $1, and think “Wow I just can’t believe its so cheap! I’m going to buy some, sit on it for a year and watch it grow to a $5000 coin”. Unfortunately, 95% of the time this dream will not come true, in a years time, you sit there scratching your head wondering why it never reached $5000 let alone $5.

The truth is that the coin is probably not undervalued at all, in fact its most likely overvalued (which as you learn more about crypto currencies, you will find this all too true).

So what is a market cap? The Market Capitalisation is the total value of a particular crypto currency on the market. It can be found by multiplying the circulating supply of a coin or token with the current price.

The following examples show why low priced coins aren’t necessarily undervalued.

This is a snapshot of Bitcoins market cap from https://coinmarketcap.com

 

As you can see the total market value for Bitcoin is quite a large sum of $198,921,695,812 USD and a total number of circulating supply (in red) is 16,818,575 BTC. So what does this all mean? Well if we look at the market cap we can see it is quite large and the number of coins in circulation is quite small. You will find if we divide the market cap (green) by the circulating supply (red) you will get the market price (blue) of $11827.05 USD.

Now lets look at an example of a crypto which might seem to be undervalued to the beginners eye. The following coin price is low but is in fact over-valued.

This screenshot is of Ripple (XRP) taken from coinmarketcap.com

As you can see the price per token is much lower at $1.42 USD. However Ripple is currently in 3rd position of market cap ranking with a value of roughly $55 Billion. So, why hasn’t XRP jumped to $11000 like Bitcoin? If you look at the circulating supply of ripple (yellow) it is much larger than that of bitcoin (approx 39 billion xrp vs 16 million btc). If we again divide the total market cap of Ripple by the circulating supply we obtain the market price of $1.42.

This is all well and good some may ask still “Why can’t Ripple get to $10000?”.

If we wanted Ripple to get to $10000 we would require a very large market cap. How big?

We if we wanted a $10000 XRP coin and there is 38, 739, 142, 811 XRP coins in circulating supply, then if we multiply $10000 by 38, 739, 142, 811 we get $387,391,428110000.

That’s right a $387 trillion market cap! This more money than the world currently has by at least 60 times! Ripple is definitely not worth that much money! Some say that XRP is overvalued at its current market cap (more on this later).

This is why it is unwise to evaluate currencies simply by looking at their price, you need to dig a little deeper and look at some of their fundamentals to help get a better picture. Take note, using the market cap of a coin is only one piece of the puzzle when determining if it is worth buying a coin.

The crypto currency market is a very volatile place and sometimes its easy to get carried away with the fear of missing out on the next best thing but if your looking to buy a certain coin for the long term then it is a good idea to ask the following question:

What kind of company is worth this market cap? Look it up on Google and get a few examples.

Notice that these companies all have working products or services? Chances are that the coin your looking at doesn’t and if it did it would be in its very early stages. Remember that most the money in crypto currencies is purely for speculation which is the cause of wild swings in prices.

Hopefully this gives you a better understanding of why certain coins will not reach a certain price

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