What Is Market Cap? Formula, Example and Why Price Misleads
Short answer: market capitalisation is the price of a coin multiplied by its circulating supply. The longer answer — why it matters and where people get it wrong — is below.
The definition
Market capitalisation is the price of a coin multiplied by its circulating supply.
Definitions in crypto are often circular or full of jargon. If you understand only that sentence, you already know more than most people using the term.
Why it matters to you
In practice, it is the only fair way to compare the size of two coins with different token counts.
The concepts that affect your decisions are worth understanding properly; the rest is trivia.
The part people get wrong
One important nuance: it is not the amount of money invested in a project.
Most costly mistakes in crypto come from a half-understood concept rather than a completely unknown one.
The formula and a worked example
Market capitalisation is price multiplied by circulating supply. Bitcoin at roughly $78,700 with about 20.1 million coins in circulation is worth about $1.58 trillion in aggregate. That number, not the price, is what lets you compare Bitcoin with a coin trading at $0.50 that has twenty billion tokens, which is a $10 billion asset and not a cheap one.
The mistake it corrects is unit bias: the feeling that a coin priced at a fraction of a cent has more room to grow than one priced in the thousands. Price per token is an accident of how many tokens were created. A coin at $0.001 with a trillion tokens needs another trillion dollars of demand to reach $1, which is more than the entire crypto market has ever been worth.
Circulating, total and max supply, and fully diluted value
Circulating supply is what can trade today. Total supply includes tokens that exist but are locked, for a team, investors or a treasury. Max supply is the ceiling the protocol will ever allow; Bitcoin's is 21 million and Ethereum has none. Fully diluted valuation multiplies price by max or total supply and tells you what the asset would be worth if every token were released at today's price.
The gap between market cap and fully diluted value is a schedule of future selling. A token with 20% of its supply circulating and a fully diluted value five times its market cap will see four more units of supply arrive for every one that trades today, on a timetable published in the project's unlock schedule. Check it before treating a low market cap as a bargain.
What market cap is not, and what to read alongside it
It is not the money invested in a project, and it is not the money holders could take out. If every holder of a $10 billion coin tried to sell, the price would collapse long before $10 billion changed hands. The figure is a snapshot at the last traded price, which for a thin token may reflect a few thousand dollars of actual trading.
That is why volume matters next to it. Bitcoin turns over a low single-digit percentage of its market cap each day; a small token with a large cap and almost no volume is a cap that exists on paper. On CoinPriceAlert's coin pages the volume-to-cap ratio sits directly under the market cap for this reason, and the size tiers used across the site, large above $10 billion, mid above $1 billion, small above $100 million and micro below that, are a shorthand for how thin the liquidity is likely to be.
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Frequently asked questions
What is market capitalisation in simple terms?
Market capitalisation is the price of a coin multiplied by its circulating supply. In practice, it is the only fair way to compare the size of two coins with different token counts.
Is a low market cap coin a better buy?
Not by itself. A low cap means a smaller asset with thinner liquidity and larger swings in both directions. It can rise faster in percentage terms and it can fall further, and it needs proportionally more new money to move than the price alone suggests.
What is the difference between market cap and fully diluted valuation?
Market cap uses the coins circulating today; fully diluted valuation uses every coin that will ever exist. A large gap between them means significant future supply is still to be released, usually on a published unlock schedule.
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Related terms
- Liquidity — how easily an asset can be bought or sold without moving its price
- Volatility — the degree to which a price moves around, in either direction
- Bull Market — a sustained period of rising prices and improving sentiment
Sources
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