As crypto is such a nascent and emerging industry, projects can grow at astronomical rates in a short amount of time. As such, being able to accurately gauge the size and growth of a given project is crucial to making informed investment decisions in the crypto ecosystem.
Market capitalizations, or market caps, are one of many important metrics for understanding a crypto project’s size, growth, and tokenomics. Put simply, the market cap represents the total value of every coin in circulation.
For example, if a project’s token has 10 million tokens released into circulation, and each token is currently valued at $50, then its market cap would be $500 million.
market_cap = circulating_supply * token_price
market_cap = 10,000,000 * 50
market_cap = 500,000,000
Market Cap vs. Fully Diluted Market Cap
There’s an important distinction that needs to be made between the regular market cap and the fully diluted market cap.
Unlike the regular market cap, the fully diluted market cap represents the collective value of the total amount of tokens that a project has. Many projects have a total token supply with only a percentage of them released into circulation. This is very useful information to know as it shows you how much more supply is waiting to be released into the market, which will inevitably influence the value of each token.
For example, let’s say the same project from the prior example has 10 million tokens in circulation, but a total supply of 20 million tokens. In this case, the circulating supply represents 50% of the total supply, meaning the circulating supply is set to double as more tokens get released.
At a token price of $50, the market cap equates to $500 million, whereas the fully diluted market cap is $1 billion.
fully_diluted_market_cap = total_supply * token_price
fully_diluted_market_cap = 20,000,000 * 50
fully_diluted_market_cap = 1,000,000,000
The Importance of Crypto Market Cap
A crypto market cap is a crucial metric to understand for gauging the valuation of a project.
For example, let’s say Bitcoin is worth $500 billion. To double its value, it would need another $500 billion. Now consider another project with a market cap of only $1 million. In this case, it would only take another $1 million to double its value. This demonstrates how having a lower market cap actually equals higher value fluctuation potential. Since there is less money in the project, they are also less liquid, so smaller orders of the token will have a larger impact on its price movement.
For this reason, it’s very important to do your own research on projects and understand the size of them. Small market cap projects are highly risky and should be approached with extreme caution. At the same time, these projects can reap much larger percentage returns. So be sure to measure the risk-reward ratio of every project you research to make informed investment decisions.
How Market Cap Affects Investors
Market caps help investors determine their own level of risk tolerance, as well as which projects are relatively more stable and thus how much money they want to invest in each project. An investor with a high risk tolerance will likely gravitate towards more small market cap projects in an effort to reap larger returns, whereas an investor with low risk tolerance will want to stick to larger and more established projects.
As with any investment, an investor needs to be prepared to lose all the money they have invested in case a project fails.
What Investors Can do With Market Cap
With a crypto market cap, an investor can make more informed investment decisions and measure the relative size of one project against another. It may also help bring insight into future price action of tokens as the fully diluted market cap reveals how much supply is waiting to be released into circulation.
FTX offers a wide variety of small, medium, and large market cap crypto projects to give its users more choice in diversifying their portfolio. With a broad list of token options, you can compare and contrast market caps, including the FTX token market cap, to make the right investment choice for you.
In addition to offering a variety of trading tools to make trading easy, FTX also pledges to contribute 1% of its trading fees towards investments in humanitarian-focused projects as part of is mission to promote effective altruism.
If you’d like to support FTX’s mission, sign up for an FTX account today and consider joining the FTT DAO, a like-minded community of FTX fans.