Understanding Market Capitalization: A Handbook for Investors

Market capitalization is one of the terms most often used in finance and cryptocurrency circles to define a publicly traded company’s size and success. However, it can be confusing for beginners because of its widespread misuse. Market capitalization’s meaning is also slightly different in the crypto space.

What Is Market Capitalization?

Here’s the simplest market capitalization definition:

In traditional finance market capitalization (often called just “Market Cap”) is the combined value of a company’s outstanding shares. In crypto, the market cap is the total value of all publicly available tokens.

Note: Outstanding shares are those stock shares that a company has issued to its investors. Stock shares represent ownership over a part of the company and come with certain privileges such as voting rights.

Importance of Market Cap 

S&P 500 Market Capitalization
S&P 500 Market Capitalization | Source: Ycharts.com

Market capitalization is a key metric investors use when analyzing the fundamentals (i.e., the financial structure, performance, and liabilities) of publicly traded companies. However, it’s important to note that market capitalization is not the same thing as a company’s shareholder equity (i.e., the total value of liquidatable assets after debt). 

“The market cap value is not the same as the overall value of the company’s assets. The value may be smaller or greater than the total value of the company’s assets.”

Hariyanto, D., 2022

In other words, market capitalization does not represent the “true value” of a company. It is simply a metric used to calculate a company’s relative size on the market and track its growth over time. 

How To Calculate Market Capitalization

To accurately calculate a company’s market capitalization one has to apply the market capitalization formula of multiplying the number of a company’s outstanding shares by the value of an individual share.

The value of a share goes up and down based on market supply and demand dynamics. Market capitalizations constantly change as investors buy and sell shares on the open market.

Unraveling the Connection: Market Cap and Company Size

“Market capitalization can be used to determine a firm’s size, which is crucial because company size is a key factor in determining a number of characteristics that investors care about, including risk.”

William, M., 2022

There exists a widespread misconception among beginner traders and investors that market cap equals company size. 

This is due to a lack of understanding of the underlying use case of the market capitalization metric — tracking the public’s perceived value of a company. Yes, market capitalization can give investors a sense of the company size but it is by no means an accurate representation.

Individual share value only grows or shrinks as a function of investor interest. The more investors seek to own shares in a given company, the more its stock price will grow. While some investors only buy stocks to sell them later for a profit, others aim to earn from dividends which can offer healthy returns on investment if companies do well. Investing when share prices are low can be lucrative in the future which drives price speculation.

Companies that perform well financially often buy back shares to increase individual shareholder value further, creating loyalty and attracting new investors.

These and many more reasons sit at the foundation of why metrics such as market cap exist. Not to give investors a concrete measure of a company’s size but to allow them to track public interest in a company and make informed decisions on their investment strategies. 

Market Capitalization For Cryptocurrency

Crypto Market Capitalization
Crypto Market Capitalization | Source: Tradingview.com

In crypto, market capitalization can be calculated by multiplying all existing tokens by the value of an individual token. 

For example, Bitcoin’s market cap can be calculated by multiplying one bitcoin ($60, 522 at the time of writing) by its circulating supply (19,696,840 at the time of writing). 

Note: Circulating supply is represented by all the coins and tokens currently in circulation on the market. Bitcoin has a maximum supply of 21,000,000 coins which are slowly released into circulation.

This gives us a market capitalization of $1,192,092,150,480. Now, is this the real intrinsic value of the Bitcoin network? We can not say, but this is the market’s perceived value of Bitcoin.

Similarly, the overall market cap of crypto (i.e., all cryptocurrencies across all blockchains) can be calculated by summing the value of each individual coin and token. CoinMarketCap puts this number at $2.25T at the time of writing.

Article Sources

William, M. (2022). An overview of market capitalization. Journal of Global Economics, 10(5). Centre for Management Studies, Rowlin Institute of Business.

Hariyanto, D. (2022). Effect of trading volume, market capitalization, and firm size in explaining return on vultures. Faculty of Economics and Business, University of Muhammadiyah Pontianak, Indonesia.