What's Market Cap?

And why it’s important in your investing strategy

Reading time: 3.5 mins

One of the biggest investing mistakes is only focusing on the price.

Continuing from last week’s newsletter, my homie started shopping for tokens and hit me up with a question:

“Fifty… Bitcoin is so expensive at $41,000! This other token is only $0.50, wouldn’t I be rich af if this becomes the next Bitcoin and hits over $40,000?”

First, there is no next Bitcoin.

And second, the price of a coin doesn’t tell you the full story. Each cryptocurrency has a different supply so you can’t directly compare the prices to each other. This is a common trap and I made this mistake too when I first got into the game.

A better metric to look at is the market cap.

What’s Market Cap?

Market capitalization (market cap for short) is the total value of a cryptocurrency.

You can calculate a token’s market cap using this simple formula: Market Cap = Price x Supply

For example: Bitcoin has a price of $41,000 and there are 21 million bitcoins in existence. Plug those numbers into our equation and you’ll get a market cap of $861 billion.

Thankfully, there are apps out there that track this for you so you don’t have to calculate it every time.

CoinGecko and CoinMarketCap are crypto data platforms that track thousands of tokens. You can look at a token’s market cap and other metrics like price, trading volume, and more.

Why is Market Cap Important?

Market cap gives you the bigger picture of a token’s value and you can use it to compare tokens.

Let’s say we have two tokens:

  • Token A is worth $0.50, has a supply of 100 billion, and a market cap of $50 billion

  • Token B is worth $500, has a supply of 100,000, and a market cap of $50 million

At first glance, Token A looks “cheaper” because it has a price of $0.50. But if you compare market caps then you’ll see that Token B has a much lower value even though the price is higher.

Market cap is also a useful metric you can use to evaluate a token’s growth potential and gauge how risky it is.

Here are two ways I use market cap in my investing decisions.

Risk and Reward

Tokens can be categorized based on their market cap:

  • Large-cap: More than $10 billion

  • Mid-cap: $1 billion to $10 billion

  • Small-cap: $100 million to $1 billion

  • Micro-cap: $10 million to $100 million

Generally, tokens with high market caps are considered more established and stable. They’re lower risk but there’s also less growth potential.

Smaller market caps are riskier and more volatile, but there’s much more upside.

You can use these categories to help build your portfolio. Want to play it safe? Invest in only large-cap tokens. Want a nice balance? Diversify across different categories.

In last week’s newsletter, I talked about how I follow a barbell strategy: investing in extremely low-risk or high-risk assets, nothing in between.

I like this strategy because it simplifies my decision-making.

I can just focus on micro-caps instead of trying to decide between thousands of tokens. And because there’s way more growth potential, I can invest a small amount of money and still get a nice payoff if it moons.

Price Targets

You can also use market cap as a way to calculate a token’s future price.

Let’s say you want to invest in Solana, a blockchain network. You’re bullish af and think it will replace Ethereum in the future.

Currently, Solana is worth $94 and has a market cap of $40.7 billion. But if Solana became as valuable as Ethereum ($295 billion) then it would be worth $684, a 7x on your investment.

You can calculate this out by hand or use a market cap comparison tool. CoinGecko has one and MarketCapOf is great too.

CoinGecko Crypto Market Cap Comparison tool

SOL with ETH’s market cap

You can also use market cap to compare tokens to other assets like stocks, bonds, and metals like silver or gold.

Another common question I get is “Fifty, how high do you think Bitcoin will go?”

I think Bitcoin will be worth more than $500,000 and 99% of the time I get a confused look from that answer. People think I’ve lost my mind. Hell, you probably stopped and thought the same too.

It sounds insane at first, but it’s simple math.

I believe Bitcoin will replace gold one day. Gold currently has a market cap of $13.5 trillion. If Bitcoin were to reach gold’s market cap then it would have a price of $640,000.

This investing thesis has kept me grounded through all the ups and downs over the years. Whether Bitcoin’s current price is $41,000 or $39,000 or whatever—it’s still a major discount compared to where I think it’s going.

Market cap isn’t the only metric I consider but it plays an important part in my investing strategy, and it should in yours too.

Peace,

Fifty Sat

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