Fundamental analysis is a cornerstone of stock market wisdom. Decades of research by top stock market brokers has created a strong system of indicators and general sentiments that can help guide buyers toward undervalued stocks or away from overvalued stocks. But relating these fundamental analysis techniques to the cryptocurrency market is quite difficult, as the technology and structure of these currencies are far removed from the way traditional stocks work.

 

But there are a few fundamental analysis basics that you can transfer over to cryptocurrency. One of these is an analysis of any currency’s market cap, which is performed similarly to a stock’s market cap (with a few crypto-specific tweaks). Here, you’ll learn exactly how to analyze a crypto’s market cap and why it’s important.

 

Understanding Cryptocurrency Market Cap 

 

In regular stock markets, the market cap of any given equity is simply the number of publicly tradable shares multiplied by the current stock price. But in the cryptocurrency world, there are no shares of a currency – instead, there are tokens or coins. These function in an equivalent manner to shares of a stock, though they can be broken into smaller pieces than stocks usually can.

 

To find the market cap of a given cryptocurrency, just multiply the number of currently available coins by the current price of one coin. It’s important to use the number of currently available coins, as coins not yet mined or freed up are not predictable within the system and may muddy the calculation due to uncertain pricing. 

 

Cryptocurrency market caps can roughly be broken down into three major categories – small cap, medium cap, and large cap. Small-cap cryptocurrencies can be considered to be those worth less than $100 million overall. These tend to be recently released projects that have very niche use cases, or currencies founded by teams with unknown backgrounds and no track record of successful projects. However, small caps have the largest potential to grow exponentially and give you realized profit if analyzed carefully.

 

Medium-cap cryptocurrencies are an interesting category, typically falling between $100 million and $1 billion in total value. Because the range in value is so wide, there are quite a few currencies that fall into this category. Many of the medium-cap cryptocurrencies are built by teams with a long history of solid products or have reputable investors and marketing backing them. They tend to have well-thought-out plans for the blockchain and their specific technology but can be slowed down by less accessible technology for the public.

 

Large-cap cryptocurrencies are few and far between, but you’ve certainly heard of the vast majority of them. From Bitcoin to Ethereum, the top currencies have all garnered over $1 billion in total value and have gotten some mainstream media coverage. These are the currencies that are likely to stay, but large profits may be hard to extract from these investments without huge up-front capital investments.

 

Why Do We Care about Market Cap? 

 

With regular equities, market cap is one of the first aspects to consider due to its singular ability to tell you exactly how important that company or commodity is worth. This aspect applies to cryptocurrencies as well – if a currency is worth more overall, then it likely has a more important niche in blockchain technology or impact on general cryptocurrency practice worldwide. It’s also important because it tells you an important concept about cryptocurrencies: how much potential there is to increase massively in price.

 

Small-cap cryptos have a higher likelihood of increasing drastically in price, but there are many poorly run or outright scammy currencies that could distract you from good choices. Large-cap currencies won’t be as likely to crash or increase dramatically but could be a solid investment that provides you with stock-like returns over similar time periods.

 

Using basic market analysis tools is essential no matter what you invest in. Finding legitimate ways to transfer fundamental analysis techniques to cryptocurrency markets is no easy task, but understanding crypto market caps is a great first step. From knowing how to calculate market cap to understanding where specific currencies fall in the larger market scheme, these tips will certainly help you decide what currencies to invest in and understand why they’re logical choices for your portfolio.