What is market capitalization?
Market capitalization (Eng. market capitalization) is a measure of the value of a company, currency or asset on the market. It is the result of multiplying the price per unit by the total number of units in circulation. For example, if one share costs 100 euros, and there are 10 million in circulation, the market capitalization of that company is 1 billion euros. The market capitalization of cryptocurrencies is similar, only digital tokens or coins are used instead of stocks. The market capitalization of a cryptocurrency is the product of the price per coin and the total amount of coins in circulation. For example, if one bitcoin costs 25,000 euros, and there are 18.8 million of them in circulation, the market capitalization of bitcoin is 470 billion euros. Market capitalization is an important indicator of the popularity, stability and growth potential of a currency or asset in the market. It can help us compare the value of companies or cryptocurrencies to assess the possibility of further growth in value.
Source: cointelegraph
Problem with market capitalization
Market capitalization is a useful measure to compare the value of different currencies and assets, but it also has its drawbacks. One of the problems with market capitalization is the fact that it is assumed that everyone is willing to sell asset x at a price y without changing prices when selling further. For example The market capitalization assumes that Bitcoin is currently worth 470 billion euros, as everyone is willing to sell their bitcoin at a price of 25,000 euros per coin. The reality is different, because already after a few bitcoins sold at a price of 25,000 euros, the price would go down. This means that market liquidity, that is, the ability to convert assets quickly and easily into cash, is not taken into account. If the market of some assets is very illiquid, with little supply and demand, the price may be unrealistically high or low, and the market capitalization can be distorted. This is especially true for cryptocurrencies, which are often subject to large price fluctuations and low liquidity. That is why it is important not only to rely on market capitalization as the only indicator of value, but also to take into account other factors, such as trading volume, historical trends, technical analysis and fundamental analysis.
Source: cointelegraph
How to calculate market capitalization?
Market capitalization is the product of the price per unit and the total quantity of units in circulation. This means that the price of one stock or cryptocurrency must be multiplied by the number of shares or coins available on the market.
Market Capitalization = price per share (coin) × number of shares issued
For example, if one share costs 10 euros and there are 100 million in circulation, the market capitalization of that company is 1 billion euros. On the other hand, if one share costs 0.01 euros and there are 10 billion in circulation, the market capitalization of that company is 100 million euros. From these examples, it can be seen that price per unit is not the only factor that determines market capitalization. It can happen that a stock or cryptocurrency that costs 1 euro is worth more than the one that costs 100 euros, if the offer of these from 1 euros is higher. For example, if one coin (cryptocurrency) costs 1 eur, and there are 500 million of them in circulation, the market capitalization of that cryptocurrency is 500 million euros. On the other hand, one coin (cryptocurrency) costs 100 euros, and there are 1 million of them in circulation, the market capitalization of this cryptocurrency is 100 million euros. Thus, a share of 1 euro is five times more valuable than that of 100 euros, because it has five times more shares in circulation. Market capitalization is therefore a measure that takes into account both the price and quantity of a currency or asset in the market.
Source: cointelegraph
Diluted market capitalization
The market capitalization of a security may change over time due to the number of shares issued. This is especially pronounced in cryptocurrencies where new tokens or coins are often issued or created. Since new offers theoretically dilute the value of existing coins, tokens or stocks, a different market capitalization formula can be used to calculate potential market capitalization, if all authorized shares or tokens were issued and still valid the current market price. This concept is called diluted market capitalization, and the formula is:
Diluted market capitalization = price per share (coin) × number of authorised shares (coins)
For example, imagine that Bitcoin trades at roughly $24,000 per coin, and that about 19.1 million Bitcoins have been issued. However, the total number of potential Bitcoins eventually is 21 million. Therefore, the calculations of the market capitalization of Bitcoin are as follows:
Market Capitalization = $24,000 × 19.1 million = $458.4 billion
Diluted Market Capitalization = $24,000 * $21 million = $504 billion
Analysts use diluted market capitalization to better understand potential changes in the price of a security, token or coin. For example, imagine that all 21 million Bitcoins are minted tomorrow. If it were to maintain the same market cap of $458.4 billion, the price would have to drop to roughly $21,828 ($458.4 billion / $21 million). Therefore, companies with large stocks of unissued securities or coins are at greater risk of falling prices if investors want to maintain the same market capitalization regardless of the number of coins in circulation. For this reason, you need to be careful what amount of coins or shares are already in circulation, and if a large amount is still not, you need to be aware of the possibility of devaluation in the future.
Source: cointelegraph
Conclusion
In this blog, we learned what market capitalization is and how it is calculated for stocks and cryptocurrencies. We have seen that market capitalization is the product of the price per unit and the total volume of units in circulation. We have also seen that market capitalization is not the only indicator of the value of a company, currency or asset, because it does not take into account market liquidity, changes in prices and the number of units in circulation, and other factors. That’s why we also came to know the concept of diluted market capitalization, which shows us the potential market capitalization if all authorized shares or tokens were issued and still valid the current market price. We hope you found this blog interesting and helpful. If you liked it, share it with your friends, and if you have any questions, comments or suggestions, feel free to write to us on our social networks (Instagram, Twitter). Thank you for reading.
