What Is Market Cap?
Market Capitalization (a.k.a. “Market Cap”) is most commonly used to refer to stocks but can essentially apply to anything. By definition, market cap is equal to the number of shares available times the price of the stock [Market Cap = (# of shares)*(price per share)]. Within crypto, it refers to the number of coins available times the price per coin.
It can be applied to any industry or market; its use is to illustrate the value of the total universe of any particular asset or groups of assets.
Once we understand what market cap is, we can begin to understand why investors talk about it. The beauty of understanding market cap is that it allows investors to take a broad, overarching view of any given investment opportunity.
For example, when I think about Bitcoin, I think about the entire market cap of Bitcoin and where I think it will be over the course of several years according to the thesis that I have made. I view Bitcoin as potential to become the global asset base, which represents roughly $100 trillion in today’s dollars. Today, Bitcoin’s market cap is roughly $920 billion, thus [in theory] bitcoin has the ability to grow roughly 100x before it reaches its full potential as an asset.
A little more on this thesis: it requires full scale, widespread adoption, and would require each person in the world to be connected to bitcoin in some way, either holding it instead of cash, holding it as an investment, being paid their salary in bitcoin, paying a mortgage in bitcoin, etc. Anything that legitimizes it as an asset and forces people to trust it as much as we trust the US dollar. And we are far from this being a reality, which is why Bitcoin’s market cap is so low in my opinion. But as it becomes more legitimate through widespread usage, I believe we will witness the market cap grow significantly.
And the reason we focus on market cap instead of the price of each coin, is because the price of a coin depends on supply and demand. If the supply of bitcoin increases, then the price of each coin will go down. The total market cap would reflect that no change has been made since the price of the coin dropped exactly proportional to the number of coins on the market.
Market cap is a better representation of the overall market.