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What Is Market Capitalization? | How It Works In Stocks And Crypto

 

By Reel Coverage Updated Jan 03, 2025

 

 

Market capitalization, often referred to as market cap, is the total value of a company's outstanding shares of stock. In the context of cryptocurrency, it represents the overall value of a token's circulating supply. 

 

Across various industries, a company's market cap serves as a vital tool for investors to evaluate its market value. It aids in the assessment of tradable shares and tokens, allowing for a nuanced understanding of investment opportunities.

 

By classifying companies based on market capitalization, both institutional investors and individual stakeholders can more effectively gauge a company's standing in terms of market interest and investor confidence.

 

Understanding Market Capitalization

 

What Is Market Capitalization?

 

Market capitalization is a value metric derived by multiplying a company's total outstanding shares of stock by its market value per share.

 

When referring to companies as “the most valuable in the world,” it is typically their market capitalization that is considered. Notable examples include Microsoft, which reached a market cap of $606 billion on January 1, 2000, and Saudi Aramco, which achieved a market cap of $2.27 trillion in July 2022, as reported by Visual Capitalist.

 

Funfact: Alphabet(Google) was the youngest company to reach $2 trillion market capitalization at 23 years old on November 2021.

 

Although not a company, as of January 03, 2025, Bitcoin is now the youngest asset to ever trade above $2 trillion market capitalization.

 

Moving on, a company's market cap often plays a role in liquidity assessment. Large-cap companies typically experience higher trading volumes, facilitating transactions for both small and large investors. 

 

Liquidity refers to the speed and ease with which an asset, token or security can be converted into cash without substantial impact on its market price.

 

Although market capitalization does not directly reflect “available liquidity” for trading, it remains a valuable metric for differentiating between actively traded companies, where price impacts tend to be minimal.

 

How Market Capitalization Works In Stocks

 

In stocks trading, a company's market cap plays a crucial role in determining the size of traditional companies and is calculated as follows:

 

Market Cap Formula In Stocks:

 

Market Cap = Share price × Total outstanding shares

 

Alternatively when outstanding shares is not determinable from data sources, a company's known market cap can aid in this discovery, simply:

 

Outstanding shares = Market Cap ÷ Share price

 

Outstanding shares refers to tradable shares of any company which excludes shares bought back into treasury and yet to be issued shares.

 

For example: if a company's share price is known to be $200 and it's outstanding shares is known to be 2,000,000,000, then the company's market cap is:

 

$200 × 2,000,000,000 = $400,000,000,000

 

Thus, the company's market cap amounts to $400 billion.

 

Why It Matters:

 

Market capitalization is an essential metric that offers insight into a company’s size, financial robustness, and growth potential. It informs investor decisions and strategic assessments regarding market dynamics.

 

● Indicator Of Size And Stability:

 

Market capitalization serves as an effective metric for categorizing companies into large-cap, mid-cap, small-cap, and micro-cap classifications. Larger firms typically exhibit greater stability and established market positions, whereas smaller enterprises may present enhanced growth potential, albeit accompanied by elevated risk factors.

 

Large-cap companies generally have diverse revenue streams, robust cash flows, and significant market dominance, which contribute to their relative stability and lower volatility. In contrast, small- and mid-cap companies are generally more vulnerable to market fluctuations, yet they may present opportunities for higher returns.

 

● Risk And Reward | Influence On Investment Strategies:

 

Market capitalization serves as a critical tool for investors seeking to manage risk within their portfolios through diversification across various company sizes. 

 

Conservative investors often choose to allocate a greater portion of their investment capital to large-cap companies, which generally exhibit slower growth but provide a lower risk profile. Concurrently, to enhance potential returns on investment (ROI), a portion of the portfolio may be directed towards small-cap companies, which possess higher growth potential.

 

● Signalling Market Trends:

 

Investors may perceive increasing market capitalizations as an indication of corporate growth or enhanced market sentiment. 

 

Furthermore, categorizing high-growth companies by market capitalization into specific sectors aids trends analysis within select industries, providing valuable insights into the economic strength and health of these segments.

 

Visual of Bitcoin market cap

 

How Market Capitalization Works In Crypto

 

While similar in overall purpose, the application of market cap data to investment analysis within the cryptocurrency ecosystem holds significant distinction.

 

Market capitalization serves as a fundamental metric within the cryptocurrency sector, enabling the effective evaluation of a cryptocurrency project. It is instrumental in analyzing the scale, stability, and potential of various cryptocurrencies or assets.

 

However, unlike stocks, cryptocurrencies are influenced by a range of market factors, which diminishes the significance of market cap in investment analysis compared to the evaluation of a company's stock market cap.

 

Market Cap Formula In Crypto: 

 

Market Cap = Current Price Per Unit × Circulating Token Supply 

 

For instance, a cryptocurrency or token with 1,000,000,000(b) circulating supply and a $50 price per unit is effectively $50 billion in market capitalization. 

 

What To Know With Market Capitalization In Crypto

 

As aforementioned, cryptocurrency prices and market dynamics differ from stocks and are essentially influenced by varying governance and market forces.

 

Key elements influencing a crypto coin or token's market cap is price and circulating supply, factors that are both easy to manipulate. 

 

Unlike stocks, a token's market cap is not necessarily a great representation of a project's industry strength nor a reflection of its potential for growth. 

 

In general, a cryptocurrency with a higher market capitalization is often perceived as more stable and lower risk. However, this perception can be misleading, as a token's market cap can increase substantially without any significant inflow of new investment. This can occur through mechanisms such as the issuance of new tokens on the blockchain or the release of previously vested tokens, like those allocated to investors within smart contracts.

 

The immediate circulation of these new tokens can result in a notable increase in the token's market cap, thereby pushing it up in market rankings.

 

For example, consider a cryptocurrency with a total supply of 10 billion tokens, of which 90% are initially vested or locked for a period of six months. At this stage, only 1 billion tokens (10%) would be recognized as the "circulating supply" as those are what's available for trade, just as in the case of outstanding shares for traditional companies. 

 

Assuming a price of $50 per token, this would yield an initial market capitalization of $50 billion. If the token's price remains stable at $50 after the six-month lock-up period, the subsequent release of the previously locked 9 billion tokens (90%) would result in a substantial increase in market capitalization, reaching $500 billion.

 

As a result, when dealing with crypto assets, investors have to consider other metrics such as; fully diluted valuation, actual liquidity across exchanges overtime, community size and volatility.

 

Types Of Market Capitalization | Explained 

 

Companies are classified into various valuation categories according to their market capitalization. This framework assists investors in segmenting companies based on value and market interest, among other metrics, thereby facilitating more informed investment decisions. 

 

These categories/types are as follows:

 

1. Mega-Cap

 

Mega-cap companies are defined as those with a market capitalization of $200 billion or more. These industry-leading firms play a pivotal role in shaping the landscape and trajectory of global markets. 

 

As of 2024, there are approximately 60 traditional publicly traded companies that meet this threshold. Currently, the only two mega-cap projects in the cryptocurrency sector are Bitcoin and Ethereum.

 

Typically, mega-cap companies are characterized by their operational diversity, extensive customer bases, and robust financial profiles, which collectively contribute to their stability and result in relatively low volatility in their share prices.

 

Many mega-cap companies also provide dividend payments, which enhances their appeal to income-focused investors. These firms are often regarded as reliable and safe investment options, suitable for generating long-term, stable returns.

 

However, due to their substantial market size, mega-cap companies generally exhibit lower growth potential, with limited opportunities for significant expansion when compared to smaller enterprises.

 

2. Large-Cap

 

Large-cap companies are defined as publicly traded firms and tokenized blockchain projects with a market capitalization ranging from $10 billion to $200 billion.

 

These companies are typically established entities that dominate their respective market segments and possess strong brand recognition.

 

Like mega-cap companies, large-cap firms present moderate risk factors, demonstrating slightly higher volatility while still being considered stable investment options.

 

Although share prices may not exhibit significant growth when compared to smaller companies, large-cap firms are generally well-suited for conservative investors seeking stability alongside moderate growth prospects.

 

Currently, there are 1,599 publicly traded traditional companies and 16 tokenized blockchain projects classified as large-cap based on their market capitalization.

 

3. Mid-Cap

 

Mid-cap companies exhibit a higher degree of volatility compared to mega-cap and large-cap companies. Defined as entities with a market capitalization ranging from $2 billion to $10 billion, there are currently 2,620 publicly traded traditional companies within this category.

 

In the cryptocurrency sector, there are 40 projects classified as mid-cap based on their market capitalization.

 

Although mid-cap companies carry greater investment risks, they are often in phases of significant growth, which can yield higher potential returns on investment.

 

Additionally, mid-cap companies frequently emerge as market leaders, positioning themselves on a path toward becoming large-cap entities.

 

Given their higher growth potential compared to large-cap companies, mid-cap companies may be suitable for investors who are willing to assume moderate risks in pursuit of potentially greater returns.

 

However, it is important to note that mid-cap stocks generally exhibit greater volatility than their large-cap and mega-cap counterparts and remain susceptible to economic downturns.

 

4. Small-Cap

 

The Small-cap category encompasses newly established billion-dollar enterprises and emerging growth companies, characterized by a market capitalization between $300 million and $2 billion.

 

These small-cap firms demonstrate significant potential for expansion, as they are frequently in the early stages of their development.

 

With a strong emphasis on niche markets or burgeoning industries, small-cap companies are often perceived as undervalued, presenting an opportunity for risk-tolerant investors seeking advantageous investments.

 

However, it is important to note that small-cap companies tend to exhibit considerable volatility, carrying an inherent risk of failure due to their limited market reach and constrained financial resources for growth initiatives.

 

Currently, there are 3,266 publicly traded traditional small-cap companies, alongside approximately 172 blockchain-based projects that share similar valuation metrics.

 

5. Micro-Cap

 

Micro-cap companies are characterized by their significantly smaller market capitalizations, typically ranging from $50 million to $300 million. 

 

These investments are often regarded as speculative due to their limited operational history and associated high-risk factors, such as restricted market interest. 

 

Nonetheless, micro-cap companies offer distinctive opportunities for substantial returns, contingent upon the company's success. 

 

It is important to note that these entities are subject to pronounced volatility, primarily attributed to limited liquidity and a scarcity of interest from institutional investors.

 

6. Nano-Cap

 

The smallest segment of publicly traded companies is classified as nano-cap, encompassing those with a market capitalization of less than $50 million. 

 

Nano-cap companies are frequently early-stage enterprises or those facing financial challenges, and investing in them is typically regarded as high-risk due to significant levels of uncertainty.

 

These companies are often traded on over-the-counter (OTC) markets, which helps mitigate price volatility.

 

Due to their nascent status and limited market visibility, investments in nano-cap companies have the potential to generate substantial returns should the company achieve success, making them suitable for investors who can tolerate higher levels of risk.

 

All market cap data are sourced from companiesmarketcap.com and coinmarketcap.com.

 

Importance Of Market Capitalization

 

Market capitalization's greatest importance lies on its quick and straightforward measure of a company's size and overall market value, which can help investors compare companies across industries. 

 

It serves as an indicator of risk and growth potential, with larger companies often being more stable but offering slower growth, while smaller companies may have higher growth potential but greater volatility.

 

What Influences A Company's Market Capitalization?

 

A company's market capitalization is affected by fluctuations in the prices of shares or tokens of related companies or projects. 

 

A substantial alteration in the price per share or token will similarly result in a corresponding adjustment in market capitalization, either increasing or decreasing, depending on the direction of the price change.

 

Is Market Capitalization Same As Fully Diluted Valuation(FDV)?

 

No, fully diluted valuation (FDV) is a financial metric that represents the total value of a company if all possible shares that could be issued in the future are converted into outstanding shares.

 

In cryptocurrency, this is determined by multiplying the total possible supply defined in the smart contract upon creation by the current price of a token.

 

Remember that market capitalization is focused on outstanding shares or circulating supply — in the case of crypto tokens, while fully diluted valuation considers shares or tokens not readily available for trade as well as outstanding shares or circulating token supply. 

 

Does Market Cap Equal Liquidity?

 

A company's market capitalization should not be conflated with its available liquidity. The available liquidity within any asset market is frequently substantially less than its market capitalization. 

 

This discrepancy arises because assets are transacted at prices determined by traders, resulting in significant price variations among market participants. Consequently, fluctuations in trading activity can lead to considerable changes in market capitalization in either direction, independent of actual capital inflows.

 

Is Market Cap A Reflection Of Total Investment?

 

No, a company's market capitalization does not indicate the amount of investment the company has received. Rather, it represents the total value of its outstanding shares or the circulating supply of its tokens.

 

The Bottom Line

 

Market capitalization is a fundamental metric that reflects a company's size and market value, allowing for the classification of companies into various segments such as mega-cap, large-cap, and mid-cap. 

 

This categorization aids investors in evaluating a company's relative scale and associated risk profile, with larger firms generally perceived as more stable, while smaller enterprises may be recognized for their potential for higher growth, albeit accompanied by increased risk. It is important to note, however, that market capitalization does not incorporate elements such as debt or earnings, which makes it merely one of several tools used for comprehensive assessment or analysis of a company or project.