1 June 2020
In the world of economics, the underlying factors are presumably taken for granted and are not focused on; however, these are the same factors which form the base of the entire foundation. Likewise, market cap and supply are the two not only significant but also something that cannot be ignored factors as prime concern is given to the price of the cryptocurrency. Unlike other investments such as stocks, shares and mutual funds it is very important to understand that cryptocurrency is different and needs learning and knowledge of every precise factors involved.
Market Cap is the number of coins available in the market multiplied by the current price of the cryptocurrency. Here the number of coins available is also known as the circulating supply. It helps determine the total value of coins present in the market and its worth.
The formula for Market Cap is:
Market Cap = Coin Price x Circulating Coin Supply
Let’s take Bitcoin,
Coin Price of BTC = $7,203.75 USD
Circulating Supply of BTC = 18, 124, 512 BTC
Market Cap of BTC = $7,203.75 USD x 18, 124, 512 BTC
Market Cap of BTC = $130, 564,509, 485 USD
A crypto-coin supply can be determined in two ways – Total Supply or Maximum Supply and the Circulating Supply. Total Supply can be defined as the number of coins that can ever be of the particular cryptocurrency, it includes the one that is circulating, yet to mine or held in reserve. The circulating supply is known as the number of coins available in the market.
Bitcoin has a total supply of 21 million coins but at present, the circulating supply of Bitcoin is 18, 124, 512 BTC.
However, a coin’s value with its supply and market cap can be known with the formula given below.
Coin Price = Market Cap / Circulating Coin Supply
Let’s take that the Market Cap of Coin A and Coin B is the same but with differences in the Circulating Supply.
Coin A: Market Cap = $20, 000, 000 and Circulating Supply = 2, 000, 000
Coin B: Market Cap = $20, 000, 000 and Circulating Supply = 20, 000, 000
Based on the Formula,
Coin A Price = $20, 000, 000 / 2, 000, 000 = $10
Coin B Price = $20, 000, 000 / 20, 000, 000 = $1
As the circulating supply increases, the price of the coin decreases and vice versa however the value of the coin fluctuating is dependent on various factors.
With some cryptocurrencies, when the supply is high it leads to more value and price than the ones with less supply. Just so how it is said, the higher the demand, the higher the price.
It could also be at times, wherein the supply is less while the value is high, this mostly happens with the coin that has higher demand. People at times buy only the coins that are ranked higher in the crypto-indices. However, one mustn’t solely base the coin’s worth with supply as various factors are involved and one needs to be updated with all the elements related to it.
Losing the private key of your wallet is as good as never being able to access your funds ever again. Hence this leads to a dead-end of the coin and in a way are lost which thus impacts the cryptocurrency’s market cap.
While investing it is very important to understand the risk/reward ratio. A crypto-coin with a lower market cap may have the higher potential on returns however it also has a higher risk associated with it.
The amount invested in a crypto-coin is not referred to as Market Cap.
A pricier coin can be cheap in value as it is limited to its supply wherein a cheaper coin can be higher in value due to its supply capacity.
The market is always changing and keeps fluctuating so the formulas associated with Market Cap and Supply will not always necessarily define the true worth and value of the crypto-coin as there are many underlying factors involved to understand the state of the coin such as the demand, confidence of the market for that particular coin, the hype of the coin, project backing it, exchange-traded, government regulation and so on. However, it is very important to comprehend on how to calculate and determine the crypto value as it is a guiding factor in the decision-making process and to learn the true value of the Crypto.