By reading the article “What is Market Cap and what are its impacts in prices” published in Adaas Investment Magazine, you will get acquainted with market cap and how to calculate it in general. This level of familiarity can be enough for you to invest in the financial market.
The term Market cap is the keyword of the term market capitalization. In other words, it is defined as the value of the total market or the total capital of the market.
To calculate the market cap index, you have to multiply the total number of distributions of an asset by its current price, and the final number is the total market value of that asset.
To calculate the market cap of a cryptocurrency, we multiply the number of tokens or coins in circulation of each cryptocurrency by its current price. For example, if Bitcoin has 18 million coins in circulation and the price of each coin is $1, the total market capital of Bitcoin is $18 million.
To calculate the market value of a stock, like all assets in the financial markets, multiply the number of registered shares of that symbol by the current price. For example, if the price of a share of a company is $1 and the number of shares distributed is 1 million, the market cap of that stock is $1 million.
Just like calculating the market value for a symbol or cryptocurrency, the total capital can be calculated for the whole market. To obtain this index, we act as in the previous two indicators and the total capital of the market is determined.
One of the most important indicators for professional investors in financial markets is the total market capital index. This index indicates the liquidity of the asset. This is very important for traders and investors because the speed of entry and exit from the market is a function of the liquidity of each asset.
Another reason for the importance of the total market capitalization index is its direct impact on trading decisions. Many novel traders and investors in the financial markets consider the price index to be the most important value index. However, it is the index of the total market capital that determines the possibility of price movement.
There are many assets in different financial markets that have very high market cap at the same time with very low prices. For example, Shiba cryptocurrency, which has a very low price but is one of the tokens with high market capital.
As you can see, the market cap has a direct impact on the decisions of traders and investors. Many people who do not work professionally, by observing the price of an asset and regardless of its market cap volume, buy or invest in that asset. A very important point that they do not consider is the possibility of price movement when they see a high market cap for an asset.
The reason for the lack of significant movement of these assets is the excessive need for asset prices to add or decrease capital to that market to move in a positive or negative direction.
For example, a cryptocurrency called XRP with less than $1 price due to its very high market cap, has experienced lower price growth than the YFI cryptocurrency with a price of more than $30,000. XRP has experienced less than 20% growth over a period of time, while YFI has experienced near 100% price growth.
In the fundamentals of investing for the market cap index and investment risk for an asset, an inverse relationship is considered. This relationship means that as the market cap of an asset increases, the risk of investing in that asset decreases. As you will have read earlier, the amount of XRP price volatility with much higher market cap was much less than with YFI, which had a much higher price but less market cap.
The reason for reducing investment risk is the different need for capital outflow or inflow into an asset to fluctuate in price. This feature in high market value assets prevents any group, person or organization from committing the crime of market manipulation!
One of the most common mistakes made by novel investors, such as the decision to trade based on the low price of an asset, is to invest only based on the market cap index. The biggest thing that professional and successful investors are reminded of is reviewing all investment factors and risk analysis based on standard models of risk calculations.
Other important indicators such as technical analysis of the price of an asset, fundamental analysis of an asset, market psychology analysis, mastery of individual psychological skills, and so on should be considered in a trading decision. If an investor buys or sells an asset in the financial markets based on only one index, it is actually called betting or gambling, which is very different from investing.
At Adaas Capital, we hope that by reading this article you will be fully immersed with the Market Cap term. You can help us improve by sharing the article which is published in Adaas Investment Magazine and help optimize this article by submitting your comments.