Market Cap Matters, Price does not
What do Price & Market Cap mean?
There is a lot of terminology related to Cryptocurrencies. It can all get a little confusing at times and people regularly misuse the terms of ‘Market Cap’ and ‘Price’.
In Layman's terms:
Market Cap is the amount of Fiat money (USD, GBP etc) currently invested into a Cryptocurrency.
The price of a Cryptocurrency is the amount that it costs to buy a single coin/token of the currency.
Enter the Confusion
People confuse these two all of the time!
It seems that I can’t watch a video or read a blog post these days without hearing someone make a statement like this…
“If bitcoin can reach a price of $2,000 then this coin can be $1 at least”
What’s the problem with this?
You can’t compare the prices of 2 currencies in terms of their potential to grow because the price is determined by a combination of both demand and supply just like the basic economic graph below:
What does this mean?
Bitcoin has a current price of $2,000 and a circulating supply of 16.4 million coins.
Bitcoin: How Cryptocurrencies Work
If you were to increase the supply to 164 million, the price would drop to $200. Raise is to 164 billion and a single coin would only be worth $0.2.
If Bitcoin had a supply of 164 billion, one coin would be worth $0.2
Even though there would still be the same amount of money invested in the currency.
In other words, if a Coin X has a supply 100x higher than Coin Y, there would need to be 100x the amount of money invested in Coin Y for the prices to be the same.
Let’s say a coin has a supply of 100 billion, the market cap would have to be $100 billion i.e.
$100 billion has been invested into it, for the price to just be $1.
Therefore, this coin would require an investment that is around 3x higher than Bitcoin currently has to just have a price of $1.
Clearly you can’t compare the prices of coins because supply alters the price too much.
How do we compare?
We’ve established that you can’t compare the price of 2 coins because some coins have relatively low supply while others have a huge amount.
Use Market Cap to Compare
We’ve already defined the Market Cap of a currency as; the amount of Fiat money (USD, GBP etc) that people have invested into a Cryptocurrency.
Take a look at coinmarketcap.com and you’ll see that the currencies are ordered from largest to smallest in terms of market cap and not price.
This is because the market cap gives us the real indication of the size of a currency.
Let’s say that we expect Ethereum to become the same size as Bitcoin one day. What we’re actually saying here is that we believe the market cap of Ethereum will be the same as the Market Cap of Bitcoin.
If you’ve heard of ‘The Flippening’, this is actually what is being referred to - the time where there is the same amount of money invested in both i.e.
they have identical Market Caps.
After the Flippening occurs, Ethereum will actually have a much lower price than Bitcoin.
Hopefully you guys can see now that the price of a currency gives NO indication whatsoever about the size of a currency or its potential to grow.
Instead, the Market Cap represents both of these things so, when you are comparing currencies, you should ALWAYS USE THE MARKET CAP AS A GUIDE, NOT THE PRICE.
I hope you guys have enjoyed the article and learnt a thing or two. I post high quality articles daily about Cryptocurrencies (which currencies to buy, where the market is headed etc.) and the other ways I make money online.Follow along if you’re interested.