In the financial markets, there are various tools that can help investors and traders and help them in making decisions. Some of these tools are as simple as they are extremely importa. Market size Or Market cap(Market Cap) It is one of these tools.
If you do not know what market cap is or have not paid atteion to its application, stay with us uil the end of this article. In this article we examine that What is market cap?Why is it importa and what applications can it have?
What is market cap?
Market cap Abbreviation of the phrase Market Capitalization Means Market value Is. Market cap is equal to Number of units A stock or property multiplied by the price Each unit of stock or property. For example, if the price of Bitcoin is $1,000 and the number of units is 19 million, its market cap is $190 billion. Markup is an importa criterion for selection investme is in an asset.
The same is true for stocks and other assets. For example, if a company's stock price is 100 tomans and it has issued 1 million shares, its market cap will be 100 million tomans.
What is the fully diluted market cap?
There is another type of market cap called Fully Diluted Market Cap, which refers to the market cap of a project after all its tokens have been issued. This number is actually an estimate of the future market cap of the project. If a digital currency has unlimited supply or has reached its supply cap, its market value and diluted market value will be equal.
Why is market cap importa?
Market value or market cap is a mathematical technique to determine the value of a market. Corary to the opinion of many people who think that price represes value, the truth is something else.
For example, the price of cryptocurrency X may be $0.3 and the price of cryptocurrency Y may be $100; But the market cap of the first currency is billion dollars and the market cap of the second currency is million dollars. In such a situation, currency X will definitely rank higher than currency Y.
There are already many digital currencies that are worth more than $100; But compared to a currency like (for example) Ripple, whose price is only $0.5, they are in a very low position. Therefore, the market cap is an importa measure of the credibility and size of a market, and the price alone will not be decisive.
Read more: What is Ripple? Everything about Ripple and the XRP currency
Classification of assets based on market cap
A company, stock, digital currency or any other asset in terms of market cap falls io one of the following categories:
- megacap(mega-cap): Market value of 200 billion dollars or more
- Large cap(large-cap): Market value between 10 billion dollars and 200 billion dollars
- midcap(mid-cap): Market value between 2 billion dollars and 10 billion dollars
- Smallcap(small-cap): Market value between 250 million dollars and 2 billion dollars
- micro-cap: Market value less than 250 million dollars
What are the uses of market cap?
Although the market value may seem like an ordinary number, it coains information that helps investors. The most importa applications of market cap as follows:
- Determining investme risk
- Ability to manipulate the market
- Investigating the importance of a technology in the market
Determining investme risk
In general and theoretically, market value has an inverse relationship with investme risk. That is, the higher the total market value of an asset, the lower the risk for investors.
In the stock market, company shares are divided io three categories: “low value”, “medium value”, and “high value”. In the discussion of shares of valuable companies, investors face less risks in investme. On the other hand, undervalued companies prese more risks to investors; Because the probability of failure of such companies is high. But these companies encourage investors to invest by giving more benefits and rewards.
The same applies to digital currencies. Investing in Bitcoin is theoretically less risky than investing in an anonymous digital currency.
On the other hand, the low total value of a stock or a digital currency means that the asset needs a smaller amou of capital to increase its price by, say, 50% compared to an asset that has a larger market size.
In general, we can say that The lower the market cap of an asset, the higher the risk; But if it goes up, it will usually be very profitable. Don't forget that the lower the risk, the lower the reward.
Ability to manipulate the market
One aspect of total market value is market manipulation. Undervalued markets are usually more exposed to market manipulation. Profit-seeking activists may be able to manipulate the market of a currency by acquiring enough of it.
According to a book written by “Edwin Lefebvre” published in 1923, in the early years of the stock markets, many people who were active in the market were able to make huge profits.
Investigating the importance of a technology in the market
You can find projects with similar applications and goals and technologies, and by adding up their market cap and comparing it with the total capital in the market, you can measure the importance and coribution of a type of technology in this market.
For example, in the stock market, you can calculate the value of all technology companies in the stock market and understand the importance of this issue in the market.
In the digital currency market, for example, by collecting the market value of privacy-orieed digital currencies, or Priosy Coins (such as Monero, Dash, and ZCash), the total volume of capital in this field can be obtained and it can be compared with the total capital in the market. He compared digital currencies and gained an overview of the position and importance of cryptocurrencies.
Read more: What is Priusy Coin or Non-Persecutory Currency? Know the best Privacy Coins
Factors affecting market cap
There are many factors that affect the market value of a property. In this section, we have listed some of the most importa factors affecting the market cap that we will examine:
- Price and number of units: The market cap formula is the number of units in circulation multiplied by the price of each unit; Therefore, it is obvious that both the price factor and the number of units/shares are the main factors influencing the market value. All the other factors that we meion actually affect the price and thus the market value.
- Project performance: The performance of the project itself is another factor that directly affects the price and market value regardless of the general market situation and existing trends. A project that has a good and differe performance attracts the atteion of investors, and a project that has nothing to say does not have much chance even in the most bullish market.
- General market situationIt cannot be denied that the general market situation affects both the price and the market value. Bitcoin is the most obvious example of this. Bitcoin is the world's first digital currency and the king of digital currencies, and there is no doubt about its good performance. But when the market goes down, even Bitcoin has a price drop and its market value decreases.
Dead coins and their role in determining the market cap
In the field of digital currencies, dead coins are one of the determining factors in calculating the total market value. Some people lose their wallets and some cannot recover their destroyed wallets. System errors are other factors that cause the loss of a person's capital. On the other hand, hackers may try to steal the funds of market participas.
Actually, the more accurate formula for calculating the market cap is as follows:
Market cap = (all coins in circulation – dead coins) * curre price
But the bad news is that there is no efficie way to calculate and determine the amou of dead coins.
Frequely asked questions
A high market cap is not necessarily good or bad and depends on your investme goals. Assets that have a large market value are usually well-known, reliable and low-risk; But it is equally unlikely that they will give astronomical profits in low time.
Market cap does not have a direct effect on price, and it happens to be the opposite; Because it is the price that affects the market value. However, it can be said that a high market value can attract investors and increase the price by increasing the demand.
no This concept applies to all financial markets. For example, in the stock market, the market value can be calculated by multiplying the number of shares by the value of each share.
final word
There are many tools available to investors that they can use to obtain information. Market value is also one of these tools. This tool clarifies the long-term perspective of these currencies for the investor.
As we said, market cap is one of the main criteria in determining the size and validity of a market and asset, and you can't just rely on the price. By checking this criterion, you can make better investme decisions.
