Education

Market capitalisation - what is it and why does it matter?

Updated: Aug 31, 2024

Published: May 25, 2019

For us to understand the principles of total and altcoin market caps, we must first start by outlining what market capitalisation is, and how it is calculated. A popular assumption within the cryptocurrency space behind why a particular coin cannot reach a certain price is because “the market cap will be too high, and it is impossible for this much capital to go into it”. This, incorrectly assumes that an asset’s price is determined by its market capitalisation, which could not be further from the truth. In reality, it is the opposite; the price dictates its market capitalisation:

Market capitalisation = price of asset x number of coins in circulation

Market participants collectively set the price of the asset in question. Whatever price market-participants are willing to exchange the asset for will determine its market value. Hence the market capitalisation of an asset is a direct reflection of its current price.

A tool we use to gauge how the cryptocurrency market is performing as a whole is the total market cap (TradingView Ticker: TOTAL). It gives us a fair and balanced view of where the market is headed. It is important to note that this index is primarily influenced by Bitcoin, as it remains the largest digital asset by market capitalisation. Bitcoin is the oldest and most recognised cryptocurrency worldwide. More significantly, the majority of altcoins remain paired with BTC, and this maintains a high demand for Bitcoin.

Bitcoin’s market share of the total market cap is called the “Bitcoin Dominance”. This can be viewed using the “BTC.D” ticker on TradingView to give us an idea of the capital flow between Bitcoin and altcoins. During the 2017 bull-run, Bitcoin started rallying before the Altcoins. As Bitcoin topped out mid-December 2017, its dominance started dramatically dropping as capital flowed from Bitcoin to altcoins. This resulted in the altcoins rallying for an extra two weeks on average.

For a balanced view of the altcoins market, another index exists, the altcoin market capitalisation (TradingView Ticker: TOTAL2). This index removes Bitcoin’s major effect on the total market capitalisation.

When the total market cap starts a new uptrend, it is usually reflected in the Altcoins’ market cap as well. However, because of Bitcoin’s massive dominance, there may be a lag factor included. This is where analysing Bitcoin’s dominance comes into play. If BTC.D starts to lose momentum and seems ready to reverse, this indicates that we may witness capital flow from Bitcoin into Altcoins. Of course, this scenario assumes that the total market cap’s uptrend remains strong. If signs of weakness start to show, in the direction of an upward trend, then BTC.D will have limited use.

In summary, these indices can help cryptocurrency traders and investors examine the market’s overall health before taking decisions. It can be a useful additional confluence to any trader’s arsenal. However, it should not be relied on to calculate precise price points. It is always a good idea to backtest any additions to one’s strategy before considering risking real capital.