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Market capitalization can be an important factor for stock market investors. But it’s not quite the same for crypto investors.
While stock market capitalization — the total value of a company’s total shares of stock — can help investors build and maintain a balanced investment portfolio, experts say those rules don’t exactly apply to crypto investors.
Here’s what crypto investors should know about market cap, and how it should (or shouldn’t) factor into your strategy.
Crypto market capitalization is the total value of a cryptocurrency. Where stock market capitalization is calculated by multiplying share price times shares outstanding, crypto market capitalization is calculated by multiplying the price of the cryptocurrency with the number of coins in circulation.
For example, Bitcoin’s market capitalization is found by multiplying the current number of coins in existence — over 18 billion — with Bitcoin’s price at a given time. As Bitcoin’s price fluctuates, which it does frequently, so too does its market capitalization. In the past few weeks, Bitcoin’s price has been between around $45,000 to $55,000, which translates into a significant range in market capitalization:
$45,000 x 18.8 million = $846 billion
$50,000 x 18.8 million = $940 billion
$55,000 x 18.8 million = $1.034 trillion
For comparison, here’s how Ethereum stacks up against Bitcoin in market cap: For $3,000 and a circulation of about 117 million, Ethereum has a market capitalization of about $351 billion. Even though there are many more Ethereum coins in circulation, Bitcoin’s value makes its market capitalization larger.
In the stock market, knowing a company’s market capitalization classifies it into an investment category: small-cap, mid-cap, or large-cap. An investor might choose to divide their investment into these groups for different reasons, so knowing the market cap is important. Market cap is often used to refer to how much a company is worth, and this value can be reflected in how risky it is to invest in the company. Large-cap stocks are often less risky, but slower-growing than mid- or small-cap stocks.
However, cryptocurrency is new. So new that these types of categories haven’t yet been formed. And since experts say you should stick to Bitcoin and Ethereum, and not let crypto represent more than 5% of your total portfolio, there is less need to use market cap in determining investment decisions.
Knowing cryptocurrency market cap might be interesting if you wish to know the scope or potential of a certain token, but it shouldn’t be as big a factor in your investment decisions as it might be in the stock market. With crypto, “It’s very important to recognize that it’s completely different from the stock market,” says Jully Alma-Taveras, the personal finance expert behind “‘Investing Latina”’ on Instagram. “It’s a completely different world.”
While market capitalization has a more limited application with crypto investing, there is one way it can potentially help guide the way you invest in Bitcoin and Ethereum.
A weighted market cap strategy can help investors even if they are only investing in Bitcoin and Ethereum, says Jeremy Schneider, the personal finance expert behind Personal Finance Club told us recently.
A weighted market cap strategy means you put a proportional investment into each asset based on market cap. So if you take the total market capitalizations of both Bitcoin and Ethereum, then divide out the percentages each crypto holds in that total, you’d end up with about 71% Bitcoin and 29% Ethereum.
This approach can help you determine how to invest $100 in the two biggest cryptocurrencies: You’d invest about $71 in Bitcoin and $29 in Ethereum.
While the experts say you shouldn’t bother with other altcoins (anything that’s not Bitcoin), the same philosophy can in theory be used for whatever you wish to include in your portfolio. Just allocate how much of a total investment amount you wish to put into each coin based on its proportional market capitalization. At the very least, this ensures you are putting much smaller amounts in other cryptos, and larger amounts in the relatively safer Bitcoin and Ethereum.
It’s also important to remember that because crypto prices fluctuate so dramatically, market capitalization is constantly changing. This fluctuation — along with the potential for the market to drop out entirely — is also why experts recommend keeping any investment extremely limited and only invest in what you’re OK with losing.
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