How to calculate realized market cap of crypto? The crypto market, as well as the blockchain technology on which it is based, has evolved significantly from its initial days after the launch of Bitcoin just over a decade ago.
It has become one of the largest and most significant financial innovations of the world.
Therefore, it does not need saying that when the existing financial system and services will be based on this innovative and useful blockchain technology, it will become much better than what it is now.
Apart from becoming more decentralized, these blockchain based services and systems will be:
- Truly borderless
- More innovative
- More interoperable and, most importantly
- More transparent.
The main reason behind this is that the decentralized nature of crypto and blockchain technology will offer the users a more feasible and suitable alternative system rather than a simple plug-in to the present banking and financial systems.
Over the past couple of years, there have been a lot of surveys and studies made on the prospects of blockchain technology, crypto, and DeFi.
And, there is one thing that is common in most of the reports of these kinds of surveys which is: the blockchain technology and crypto can help in making better transactions and even make it possible to turn business models that were seemingly infeasible before into more viable ones.
However, the worth of the crypto landscape today is truly a hot topic for debate.
Therefore, there is a need for a more feasible and proven approach to assess the market cap of crypto.
As of now, the total market worth of crypto is estimated to be more than $3 trillion and that is where the debate is on.
Few people say it is more and a few say it is less and that is why it is necessary to calculate the realized market cap of crypto.
And, this is the article which will tell how to go ahead with it along with a few other aspects related to it.
Contents
How to Calculate Realized Cryptocurrency Market Cap?
Cryptocurrencies and blockchain technology has gained a lot of traction after its inception among the people all over the world.
However, as you may know, when people talk about blockchain technology and crypto in general, they, and the others talked to, immediately imagine or relate it to Bitcoin.
Such is the synonymy of Bitcoin with crypto and the blockchain technology.
Though most of its synonymy is lost now, Bitcoin is still regarded as the key anchor of the crypto industry and one of the most reliable indicators.
It tells about the movements of prices of other types of crypto coins and what is about to happen in the crypto market.
Not even five years ago, when any crypto investor or trader wanted to find out the state of the crypto market, invariably, the first question of the person was about the prevailing price of Bitcoin in the market.
This is because Bitcoin acted as the most reliable and feasible parameter to judge the market conditions which helped them in planning their next moves.
And, when the crypto investors and traders have a fair idea about Bitcoin, it is easier for them to create new, continue with the existing, or make amendments in their crypto investment and trading strategies.
However, things now have changed quite a bit.
Now, the time has come when the financial systems all over the world need to develop on a large scale and function without the necessity of an intermediary as much as possible.
And, it is the blockchain technology, crypto and DeFi platforms and instruments that will allow them to make more real and functional applications.
It is this ability of the blockchain technology, crypto and DeFi platforms and instruments that has attracted huge capital worth billions of dollars over the couple of years into the crypto market space.
The industry has used this additional resource for further development of the technology, applications and their services to make the field more user-friendly and competitive in the future.
It is also due to these changes that the crypto traders and investors should also make a change in their approach to determine their trading and investment strategies that they did so far based on Bitcoin alone.
Now, they will have to look into the specific crypto coin that they want to trade with or invest in.
This will help them to formulate much better and more productive crypto trading and investment strategies.
Talking about capital, at this point, a brief discussion regarding the ICO or Initial Coin Offerings is required.
The ICOs are a commonplace in crypto and were much hyped in 2017 and this resulted in a steep increase in the launch of these offerings which eventually resulted in a price crash of almost all crypto coins in 2018.
However, after that there was a huge influx of funds through the ICOs which was largely unnoticed.
This helped the blockchain community in upgrading the technology and bringing it up to the next stage of evolution.
So, you may want to know at this point what the actual value of the market cap of crypto is with all these funds and resources pouring into the market space readily and continually.
Well, with all that said about it the most prominent crypto coin still is Bitcoin in terms of both the price of a single unit of it as well as its market capitalization.
According to several survey reports, Bitcoin accounts for 50%, give or take a few percentages, of the total value of the crypto assets and market on its own.
Therefore, as of 2022, it is most important for any crypto trader or investor to know about the total market cap of crypto while inquiring about the state of the entire crypto landscape.
However, looking at the survey reports of a couple of years, the findings are quite amazing.
The total market cap of crypto doubled the amount of the previous year while reaching a staggering estimation of about $2 trillion in 2020.
This figure went up even further by a trillion dollars by the end of November 2021, and it is still counting.
Therefore, you can very well imagine how big the crypto market is.
In fact, the value of all of the crypto coins available in the market is almost neck to neck with the total market value of some of the largest publicly traded corporate majors such as Apple, Amazon, Microsoft, and others.
However, at the same time, it is this high valuation of the crypto market cap that raises a few significant questions regarding its value estimation, and especially on the way it is determined.
In order to have a much better understanding of that, it is first required looking into the market cap calculation process of traditional stocks.
As you may know, the market cap of traditional stocks is typically calculated by multiplying the total number of stocks that are in circulation and available to the public by the last trading price of the stocks.
As for the traditional shares, the value of them is backed by particular economic fundamentals such as the total assets. This includes:
- The liquid assets
- The tangible assets and
- The intangible assets.
In addition to that, it also includes the future cash flows as predicted.
As a result, the total cap value and the prices of the traditional stocks are quite reflective of the state of a company by and large.
However, much to the contrary, when it comes to the market cap of crypto, the relation between the prices of the individual coins and the total market cap is pretty unclear in comparison to that of the traditional stocks.
The main reason behind such ambiguity is that the cryptocurrencies typically do not have any assets to back it up, namely, tangible assets and liquid assets.
However, there are a few cryptocurrencies that are backed with tangible assets but that are very limited and cannot properly justify the market cap of crypto and its current market price.
That is why it is so important to determine the realized market cap of the crypto assets.
At this point, before you know how exactly the market cap of crypto is calculated, you should know what it really comes down to.
Typically, in the end, the market cap boils down to the brand value.
This is actually the value that indicates the belief of the crypto investors and traders in the long term potential of the coins as well as the combined belief of crypto buyers in the current price of the coin they are investing in.
It is this belief, which is more relatively called the market sentiment, that makes crypto so infamously volatile.
It is this volatility of crypto that offers the traders and investors opportunities to gain beyond compare.
On the other hand, this volatility also offers them the highest degrees of risks related with crypto trading and investments.
As you may know, when it comes to crypto investment and trading, there are important levels of risks to consider for every trader and investor which include and are not limited to:
- Market risks
- Counterparty risks
- Security risks
- Tracking risks
- Programming risks and
- Future regulatory risks.
In addition to the above mentioned risks, this also raises an important question regarding the authentic current and long-term value of the entire crypto space.
The best approach to find the answer to this question is to find out and analyze the structure of the total market capitalization and the specific ways in which it is calculated for all of the different types of crypto coins available all over the world.
Normally, the calculation of market cap of crypto is pretty much similar to that of the method used to calculate the market cap of the traditional stocks.
That is, by simply multiplying the total public supply of the coins with the last trading price of each crypto.
So far, so good, but this approach has quite a few significant downsides.
One of the most significant downsides of it is that not every crypto coin or token available for trading in the market is traded at the price that was last recorded.
Though a few of the coins and tokens do but that typically comprises an insignificant portion of the total volume of crypto assets.
For example, a particular type of crypto coin or token can be traded ten different times at ten different prices as compared to the price of the previous trade.
Such variations in trading prices of a particular crypto can raise a lot of discrepancies in the calculation and may even raise the total market cap of that crypto by ten times, even if it is just for a few seconds.
Therefore, it is clear that disregarding the trading volume is quite absurd, if not utterly insane because it is a major indicator of the real value of an asset and even its long term value.
This means that the total market cap that you may see being advertised on the websites is more often than not the unreal value of a crypto.
This also means that while calculating the market cap of crypto, it is essential to calculate it on the basis of the volume-weighted average of all the trading prices of a specific crypto coin on different exchanges.
It must be kept in mind that it is very important to track and use the circulating supply of a crypto rather than the total supply of coins.
This is because, after all, it is actually the circulating supply of coins that is really available on the market at any given point in time.
About Realized Market Cap Approach
It is the realized market capitalization of crypto that can offset the deviations and discrepancies mentioned above.
This is a very good notion to consider because in this approach to calculate the market cap of crypto it is determined basically by multiplying the last price at which the coin was traded by the number of coins.
This gives a more precise figure.
This is because it will not consider the situations or prices when the specific crypto coin or token was dormant.
It may be for days, weeks, months, or years.
The last transaction of the coin will only be taken into account regardless of the fact that the price at that time was much lower than the price of it at present in the market.
This approach of calculating the market cap of crypto is also more objective because it will not consider the volatility factor to the highest possible degree and the short-term speculations.
This means that this approach will set up a clearer perspective on the matter which will be more long term.
However, just as with any other thing, even this method comes with a few specific bottlenecks.
A few of these are:
- The complicated technological issues
- The lack of transparency that the blockchain technology is alleged to have and
- The manipulation of the circulating supply and total supply ratio of the coins.
Considering Bitcoin, which is one of the most commonly considered coins by all crypto traders and investors as a basis for making all different calculations and assessments, it is supposed to have the most transparent ledger.
However, in reality, when the two values of market cap of Bitcoin ascertained by the traditional method and the realized market cap approach and compared with each other, it is seen that the latter is about 1/3 of the former value.
This means that for all other different types of crypto coins the gap between the two values ascertained by the two different calculating methods will be much larger and more pronounced.
This indicates that the total market cap of the crypto space will be much lower than what it actually shows.
Taking Real Money Into Account
Even when you follow the above mentioned realized market cap approach, the value may not be as accurate as you want it to be in spite of the fact that this approach is considered to give a more balanced and long term crypto space valuation.
This is because the method still does not take into account the real world value of the blockchain assets that are supporting the coins.
However, at this moment and at any given point in time as well, it is only the amount of fiat money that is invested in crypto can be considered because it is the only tangible asset that can be attached with crypto coins.
Therefore, it is only when the real money is taken into account such differences can be done away with quite easily and efficiently.
When the value of crypto market cap is calculated in this way, it also makes the process quite easier.
As you may know, cryptocurrencies typically can be, and are done to a certain degree by most of the traders, traded against one another.
Normally, the crypto coins are bought and sold for stablecoins which are those specific coins or tokens that are backed by a specific fiat currency, which is US dollar most notably.
These stablecoins can be minted only with fiat money of an equal amount.
This means that when you consider the total supply of these stablecoins, you actually get the accurate amount of the real world money that has been invested in the blockchain technology space.
For example, if the total market cap of stablecoins is considered to be about $170 billion, it will account for less than 10% of the total market cap valuation of crypto.
If you consider this as the historical median, you will find that the actual tangible value of all of the crypto coins of the world is simply 1/10th of their trading prices.
And, the actual picture may be more shocking.
Is It the Best Way?
If you want to get a fair idea about the popularity of a crypto coin before trading or investing in it then the market cap of it more or less will reflect it.
However, the question is whether or not it is the best way to judge the popularity of a crypto coin.
A lot of people criticize this approach and concept behind this in spite of the fact that the market cap of a crypto coin is considered by all as one of the best indicators of its relevance.
It is said that the crypto coins that come with a large market cap are considered to be less volatile and therefore are highly likely to be safe when it comes to investments as compared to other crypto coins.
This is the most conservative form of investing in crypto.
However, even these coins are considered to be more volatile when compared to the stocks and other traditional assets of its likes.
When the crypto coins with mid-range caps are considered, these are more volatile in nature as compared to the large cap crypto coins but have a much higher potential for growth.
And, the small-cap crypto coins are considered to be extremely volatile and therefore these are considered to be extremely high-risk investments.
These coins can crash at any moment. However, everything is not bad about these small-cap crypto coins.
Sometimes they do offer a lot of potential for growth, of course in the short term.
Therefore, making your investment decisions simply based on the market cap of a crypto in particular or the market on the whole is surely not the best way to go ahead.
This is because the market cap is not a reliable metric that says much about the real trading volumes in the past couple of hours of the specific crypto coin you want to invest in. it also does not consider the volatility factor in the calculating methods.
That is why, as it is always with crypto coins, you should do a thorough research and your due diligence to consider all other important factors related to crypto investments.
Prospects Ahead
It is only when you are very specific and strategic in your crypto trading and investing approach you will be able to make the most out of the prospects and benefits crypto will offer you down the road ahead.
And the prospects of the specific crypto coin can be assumed quite significantly from the market cap.
It will give you a fair idea about everything that is required to know before you make your investment.
Ideally, to know the prospects of a crypto coin, you will need to know about:
- The blockchain technology space in general
- The upsides and downsides and
- The present state.
Typically, the long-term prospects of the crypto will be associated with one too many things that you should also be aware of apart from the market cap only.
First of all, you should be aware of the volatility aspect of crypto prices. It is here to stay.
You will also need to know about the market in general, which, at least in the near future, is quite a long way from coming out as a more mature market.
Another important factor for you to know as a crypto investor is the stability of crypto coins and the market on the whole.
It will take years, if not decades, for the crypto market to be as stable as the traditional stock market as you know today.
And, then there is the risk/reward ratio related with crypto investments and trading, which, by itself, is a pretty deep and a long topic on its own to be discussed in one single article like this.
Talking about the prospects of crypto, if you assume that just a single dollar can increase the current value of the market cap of a particular crypto coin by up to ten times, then you can make a lot of things about its price for yourself.
You can see that the historical highs of the prices of Bitcoin and all other types of crypto coins and tokens have a long way to go to reach that level, even if it is quite short lived if and when it is accomplished.
And, looking at things over and above the high volatility of crypto and its temporary and short time spikes, the blockchain technology itself has a lot to do in order to find its true value in the long term.
It still needs a lot of developments and widespread adoption.
And, as for the other blockchain based companies, their products and services need more commercialization so that they can be used by others in their daily lives.
It is only when all these things are done the price fluctuations of any average crypto asset will be pretty similar to that of the traditional stocks.
It is only then that their realized market cap will increase substantially compared with the market at the global scale than what is suggested by the current short-live highs of the crypto coins.
Conclusion
Market cap is an important indicator of the prospects, popularity, and dominance of crypto. It helps in keeping track and measuring the market value of a coin.
But, as pointed out in this article, the total market cap is far from the realized market cap.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.
