What the heck is “market capitalisation” (market cap)?
Ok, you've probably been on Coinmarketcap or Coingecko and been "blown away" by the gigantic numbers. But what do these numbers actually say? And why are the reports and articles not always correct when they are written about?
Not only do we want to address these questions here, but we also want to take a closer look at the term (total) market cap.
Surely you have also seen headlines like "10 billion dollars have just been pulled out of the Bitcoin market", just because you see exactly this sum as "missing" in the market cap - but here is already your thinking error. If you intend to trade in the crypto space, it should be clear to you that the market cap of a coin or token says nothing about whether money flows into this project or leaves it. We will see why this is the case in a moment.
Basically, to calculate the market cap of a coin or token, we multiply the number of existing coins/token by the current price. As an example, let's take Bitcoin - the most well-know coin in the crypto space:
Today (12.08.2022) there are 19,119,500 BTC, the price is about $23.700 per BTC. So we do: 19,119,500 BTC x $27.700, we get a market cap of 454 billion dollars. 🙂
Foremost, not all BTC are traded - it is rather the case that almost all BTC created in the founding year 2009 are still in their original addresses and do not influence the price development active. In extreme cases, it could even be explained that the investor of the BTC or the owner of these addresses lost the private keys and thus these BTCs can be never moved again. It would be an option to exclude them from the overall calculation of market cap, but no one knows for sure. But it is understandable that lost or stuck coins can not longer trigger an active price development.
Nevertheless, they have an influence on the market cap though a calculation formula:
Let's assume you create a "Happy-coin" today with 100 Coins total supply, and you own them all. As long the coin has no value, the market cap is $0.00 (100 Happy-Coins x $0.00 = $0.00)
Your buddy comes and buys 1 Happy-Coin for $10,00, the market cap is: $1.000 (100 Happy-Coins x $10.00)
If your buddy sells his Happy-Coin to someone who only gives him $8.00 for it because he needs money quickly, the market cap drops to $800, although only one Happy-Coin changed hands for $8.00. Remember - you held the other 99 Happy-Coins all the time yourself, and they were not available to the market for pricing at any time. But they still had an impact on the market cap just by existing.
The more coins there are of a currency, the greater the impact on the market cap would be mathematically.
The more coins there are of a currency, the greater the impact on the market cap would be mathematically. Run through this with your own figures to check it out.
It should now be clear that these huge sums of money do not flow into the market or leave it. Always calm down, think about it and react prudently.