Gareth Johnson
Gareth Johnson
Updated on December 28, 2021

When you’re first starting to delve into the world of investments and cryptocurrencies, sooner or later you’ll come across the terms market cap and market capitalization. Active traders and investors are probably familiar with these terms but beginners might be confused and overwhelmed by some of this stock market lingo.

Both the stock and the crypto market abound in technical terms like tokens, total supply, circulating supply, dividends, market value, short-term investments, long-term investments, ETFs, etc. Newcomers might be dismissive of these terms and wonder whether they’re absolutely necessary to know or they’re just a combination of upper-class words that the market analysts and corporations like to throw around to sound fancier than the rest.

On this note, the market capitalization of a given stock or cryptocurrency should be taken seriously because it provides an overview of the asset’s market movements, which comes in handy when assessing the potential of a given cryptocurrency and predicting its future movements.

In today’s article, we’ll explain what market cap means, how it’s calculated, the different types of market cap and the jargon linked to it.

What Is a Market Cap?

Market cap or market capitalization is the total market value of a given company. The market cap is determined by a simple mathematical equation, which consists of multiplying the company’s stock price by the number of its outstanding shares.

Let’s illustrate this with an example. Imagine there’s a company called Van Der Pops & CO. The VDP company’s investment bank has an IPO or Initial Public Offering where it establishes its market cap at $500 million. This means that they’ve issued 25 million shares at the current market price of $20 per share. This is how the market cap is determined. The number of shares multiplied by the price of the share equals the market cap for Van Der Pops & CO.

Hand holding physical bitcoin on grey background

If the market price drops while the number of shares remains the same, this would have a direct impact on the market cap. The price drop would represent a change in the percentage of the company’s market cap for a given period of time. This is why traders and investors are obsessed with changes in stock prices. Just a $0.20 stock price drop could become $200,000 in losses for a trader with a million shares.

The prices of stocks are determined by supply and demand. When a stock is sold, the seller and the buyer are exchanging money for the ownership of that stock. The price of the stock that was purchased becomes the new market price for the stock.

Market Cap Categories

The market cap is very important when you want to start investing because it’s one of the best measures that you can take into account when looking for a company to invest in. The market cap helps users choose the company they’d be investing in by displaying all of their stock’s characteristics. Whether it’d be the company size or what your expectations should be when investing, the market cap is a helpful metric in determining your choice of investments. 

Large companies have more mature and stable business systems. They are veteran companies that have survived economic downturns, inflations, and difficult business climates. On the other hand, the main downside of large companies is that their expanding options are severely limited because they have depleted and taken advantage of all of the available resources to reach their current size. Although investing in these large companies is generally considered a wise investment decision, turning profits might go a little slower than expected. This is due to the more expensive shares compared to those of small companies.

In comparison, smaller companies are companies that haven’t reached their peak yet. They have more room to grow and are typically considered risky business ventures. The odds of failing are definitely higher than when you’re dealing with larger companies but there is also a higher chance of rapid growth. Their shares of stock tend to be cheaper and many of them try to create their own niche markets in order to make a name for themselves and grow both in market cap and company size.

The company size is measured using the following categories: mega-cap, large-cap, mid-cap, small-cap, and micro-cap.

Mega-Cap

Mega-cap stocks are companies that have a market capitalization of over $1 trillion. The most famous mega-cap company is Apple, which has the world’s largest market cap with more than $2 trillion in stocks. The highest market caps after Apple are Microsoft and Amazon. These companies have their own investment strategies, as their stocks are quite expensive and even minor fluctuations can result in great losses or gains. Mega-cap companies tend to be stable, which makes them safe to invest in.

Vector illustration of hands on laptop with crypto market trend on screen

Large-Cap

Large-cap stocks have a market cap of over $10 billion. Most of the popular and famous companies in the world are large-cap companies. These companies have proven themselves as leaders in their industry having survived fierce competitors and dealt with the ups and downs of their designated industry. The best dividend stocks can be found in large-cap companies due to the fact that they generate more cash than they actually need for their business to operate and return some of that extra capital to their investors in the form of dividend payments. 

Large-cap companies follow a criterion that consists of sustainable competitive advantage, dominance in their industry, a great track record, solid and steady sales and revenue, certified upper management, and reasonable stock prices for trading. Some of the most popular large-cap companies include Walt Disney, Nvidia, and Tesla. There are many large-cap companies whose activity you can view and monitor using TradingView.

Mid-Cap

Mid-cap stocks have market caps set between $2 and $10 billion. They occupy the middle ground that separates large-cap companies from small-cap companies. Mid-cap companies have achieved considerable progress in developing their own business model and they offer their investors stability, protection, and general safety from future challenges that mostly affect small-cap companies. These companies sometimes take on the risk of disrupting or dethroning some large-cap companies to realize their own financial goals.

However, not all mid-cap companies are growth stock companies. There are smaller companies as well that operate in their own industry niche without growth prospects or former large-cap companies that have declined due to the competitive nature of their industry.

Some good examples of mid-cap companies would be Levi Straus & CO, Upwork Inc, and Plug Power Inc.

Small-Cap

Small-cap stocks are companies that have market caps between $300 million and $2 billion. Think of growth stocks that are just landing on their feet and aspiring for greater heights. 

Historically, most of the small-caps have performed well over their course and delivered above-average returns but there have also been cases of companies that have failed and become obsolete. Small-caps are viewed as more volatile when compared to large-caps and are considered high-risk investments with high-reward potential but in many cases, they can be high risk and produce no reward.

Woman writing on desk in front of computer and laptop with financial trend on screens

A few good examples of small-cap companies would be Health Catalyst, Agree Realty, and PDC Energy.

Micro-Cap

Micro-cap stocks are usually in the range of $50 million and $300 million in market cap. Micro-caps are the highest risk investment companies due to their small size and the fact that there is very little information about them online as opposed to mid-caps and large caps. These companies are generally new and mostly trade with pink sheets that have low listings on popular stock exchanges like NASDAQ.

Some examples of micro-cap companies would be ACM Research, AppHarvest, and Carparts.

Market Cap vs Enterprise Value

Young investors and beginners might be confused when they see the term market cap closely used along with the term enterprise value. The main difference between a company’s market cap and its enterprise value is that the market capitalization reflects the company’s equity value, while the enterprise value reflects the total capital of the company including its past investment debts.

The enterprise value is calculated by adding the company’s market cap to the company’s debts and subtracting the cash flow. This enterprise value methodology is used by investors to calculate a rough estimate before purchasing a company and privatizing it.

Cryptocurrency Market Capitalization

So far, you’ve learned that market capitalization represents the total market value of a company or the total fiat value of the shares in the company’s stock. In the world of cryptocurrencies, market cap refers to the total number of mined coins and their price

To determine the cryptocurrency market cap, you should multiply the circulating supply of mined coins with the price of a single coin. For example, let’s say we’ve created our own cryptocurrency, Bitpop (BTP), and we’ve placed a 2 million limit on the total number of coins that can be mined. 

Gold bitcoin with market financial graph on background

Currently, there are around 900,000 BTP in circulation out of the 2,000,000 total supply. The price of a single BTP is set at 17$. When we multiply the total supply in circulation (900,000 BTP) with the current price of one BTP (17$), we learn that the market capitalization of Bitpop is $15,300,000.

the crypto market cap is a rough estimate of the stability of any digital asset. Cryptocurrencies are volatile by nature but with the market cap, analysts and experienced users can use it as a metric and invest in the right crypto at the right time. In plain terms, the market cap tells users about all of the price fluctuations of a given crypto. If the prices used to be higher in the past, as opposed to now, there is a chance that the prices will go back up again if more people purchase that crypto at a lower price, thus increasing its demand.

Crypto Market Cap Categories

Just as we have tiers in the stock trading world, so too are there market cap tiers in the world of cryptocurrencies. There are many different cryptocurrencies with different market caps, liquidity, trading volume, and actual impact on the market. In the world of stocks, comparing large-cap companies with small or micro-cap companies is like comparing Coca-Cola to some penny stock company. Different categories with different expectations.

The same principle applies to cryptocurrencies. If we compare a large-cap cryptocurrency like Bitcoin to some newly released ICO token, we will see that they aren’t in the same category. This is why different cryptocurrencies are divided into tiers like large-cap, mid-cap, etc, based on their market cap. We’ll list below each category with a few coin examples.

Large-Cap Cryptocurrencies

Large-cap cryptocurrencies are cryptocurrencies that have a market capitalization above $10 million USD. With the current market database, we can say that only four cryptocurrencies are worthy of being named large-cap cryptos and those include Bitcoin (BTC), Ethereum (ETH), the stablecoin Tether (USDT), and Ripple (XRP). These cryptocurrencies have an excellent track record and operate as successful alternative payment methods and store-of-value properties. They enjoy the highest prices but can be purchased in fractions and are rightfully considered the shiniest stars in the crypto-galaxy.

Generally, large-cap cryptocurrencies have high liquidity, lower volatility, and are considered low-risk investments. When we say that they have high liquidity, we mean that these cryptos can be found on almost every cryptocurrency exchange. The high trading volume means that a potential user can place a buy or sell order and his order will be filled almost immediately.

Mid-Cap Cryptocurrencies

Mid-cap cryptocurrencies are cryptocurrencies that have a market capitalization between $1 billion and $10 billion USD. These crypto projects are well established on the market and are in the expanding phase with expectations of rapid growth both in value, adoption and of course, market capitalization. Some of the more popular cryptos in the mid-cap tier include Litecoin (LTC), Cardano (ADA), ChainLink (LINK), Monero (XMR), and Tezos (XTZ).

Hand holding bitcoin against market trend on screen

Mid-cap cryptocurrencies are generally more volatile than their large-cap counterparts and also carry a higher investment risk as these coins are not as established as the larger ones. The cryptos in the mid-cap tier are still in their development cycle, which means they have room to increase their utility and features and reach their full potential.

In hindsight, mid-cap cryptos are expected to perform with flying colours in the future, and utilizing them in your trading portfolio might be an endeavour you will be thankful for. Just remember to choose wisely as not all mid-cap coins have the potential to transform and join the golden crypto club of large market-cap coins.

Small-Cap Cryptocurrencies

Small-cap cryptocurrencies are cryptocurrencies that have a market capitalization of less than $1 billion USD and more than $100 million USD. These crypto projects are generally under-funded when compared to mid-caps and their track record is not yet fully established. Most commonly, they are coins in the infancy stage and carry a high investment risk as many of the small-cap coins tend to fail or become obsolete in the long run. There are some hidden gems in the small-cap tier which with some intense research could be a rewarding feat to the investor who spared the time for market analysis and investigation. Some notable small-cap cryptos include Ethereum Classic (ETC), Dash (DASH), Zcash (ZEC), IOTA (MIOTA), and Dogecoin (DOGE).

In terms of volatility, small-cap coins are in the highest risk category. Small-caps are the most volatile coins compared to their counterparts. This is because they’re liable to price fluctuations. Because they are mostly cheap, a large buy or sell order can have a great impact on their price and move it upwards or downwards depending on the order. Small caps are also hidden in some way from mainstream media because they don’t have much history and it’s harder for them to break out on the market as there are many different small caps currently on the market.

Micro-Cap Cryptocurrencies

Micro-cap cryptocurrencies are even riskier and more volatile than small-caps but they are extremely cheap to purchase so there can be no real harm to potential investors. If we find them a counterpart in the stock trading world, it would definitely be the penny stocks. Micro-caps most commonly come in the form of a token launched by some small developer team or a single individual and they represent cryptos with less than $50 million in their respective market capitalization. These types of crypots have great growth potential but their chances of success are lower as they are many in number. Finding the right one might require some finesse and of course, a bit of luck.

Financial graph with world map on blue background

Is Market Cap Important for Cryptocurrencies?

When investing in crypto and choosing coins based on their market cap, users shouldn’t only rely on the market capitalization information. 

This is because the crypto market cap may lead to some insights on the size and current value of a cryptocurrency but has nothing to do with the money flow or liquidity of that particular asset. The crypto market cap doesn’t really state how much money there is in the market for a given cryptocurrency, it just indicates the current price and the total supply of circulating coins. The main thing to understand here is that the total mined supply doesn’t equal the number of coins being sold, as some of them may be resting in personal wallets, instead of being traded on an exchange.

Therefore, while the market cap is a useful tool that helps calculate the possible profit from your target cryptocurrency, as an investor, you should always do further research and obtain as much information about the entire crypto project, examine its track record and keep a close eye on the daily trading volume.

A Few Words Before You Go…

In this guide, we’ve covered the basics behind market capitalization as well as its different tiers and categories for both stocks and cryptocurrencies. We learned that market capitalization is important for both investors and companies because, in reality, it acts as a window into the company’s core. It helps investors see for themselves how things stand with a stock company or a cryptocurrency project just by making a simple mathematical equation and figuring out whether the terms are right for them and might bring them any profits. With this newly-gained knowledge, it’s up to you as investors to try your hand on the open market..