What is it?
Lets start this post off explaining what market cap is.
It is very simple and is the same for every example. For example there are 100 red cars and they are worth $5 each. The total market cap would be $500. 100 times 5 is 500 so that is the estimate value of all the red cars.
The same goes for all the Crypto Currencies, Bitcoin is worth around $11,000 each and there are around 17 million available currently. So the total market cap would be 11,000 x 17,000,000. Just shy of 200 billion dollars.
You might be looking at coins and wondering why coins have such massive price differences at almost the same ranking and market cap. This comes down to how many coins are in circulation, most of the early currencies had less coins because the demand was less back in 2011-2012. Now in 2018 the demand has grown and higher numbers of coins are normal for new currencies.
More coins = Less for each coin
500 red cars with a $500 market cap would be $1 each
Less coins = More for each coin
5 Green cars with a $500 market cap would be $100 each
What can it tell me?
That covers the basics of how market cap works, if you can understand that it will stop you making rookie moves that can cost you, like just because a coin is expensive like $500 each you don’t buy it or because one coin is $1 you buy up large. Both coins are the same thing.
If you can follow that easy enough keep on reading.
Market cap can let you know how much potential growth coins have, people saying things like “they have made 5,10 ,20 or even 50 times there money on a coin.”
Coins in the top 10 have up to 3x returns or 50% losses per 3 months.
Coins in the 11-20 have up to 5x returns or 60% losses per 3 months.
Coins in the 21-50 have up to 8x returns or 70% losses per 3 months.
Coins in the 51-100 have up to 10x returns or 80% losses per 3 months.
Coins in the 101-200 have up to 20x returns or 90% losses per 3 months.
Above is basic information that can let you know what to expect if you invest in Crypto currencies, that chart is not perfect but a good guide line for any trader. If you want to invest in the smaller coins you have to be prepared to lose almost all your money at the risk of making big returns.
Some coins like tether are fixed to the USD so that is fairly stable, more than 10% over 3 months gains or losses would be unlikely.
Is it a joke and what are the downsides?
This is were the problems start, market cap only tells you number of coins x current price. This is a massive problem because you might think a coin would need to have half of the total market cap removed to drop 50% in price.
Lets say you have the 500 red cars with a $500 market cap. You might think if $250 of total invested into the red cars was removed you would be have a market cap of $250 and each car would be worth $0.50… Well that is completely wrong. We have no idea how much is invested in these coins or how many people are invest or how much each person has invested. I will give you a example to better help understanding.
Green Car example
50 green cars get made, they have a starting price of $5. I come along and buy 45 of the green cars for $225 total. There is 5 cars remaining. 5 people buy the remaining 5 cars. A few months pass and green cars get some good publicity and 100 people want green cars but only 5 are fore sale because I refuse to sell. So the price rockets up to $100 per green car. Then the 5 remaining cars get traded for a few months at $100.
The market cap for green cars would be $100 x 50 = $5,000
The total amount of money invested in green cars is only $225 + $500 = $725
The total investors in green cars would be 6.
Green cars would have a good upwards trending graph.
This is were it gets bad
Then I think to myself that green cars have made me all the money that they can. So I start to sell green cars one every day to maximise the return I get and not crash the price. Each day the price drops a small amount but stays above $50. I end up selling all my green cars for a average price of $75.
$75 x 45 = $3,375 massive profit on my investment.
Current market cap for green cars is $75 x 50 = $3 ,750
Total invested in green cars is 100 x 5 + 75 x 45 = $3875
Total investors in green cars 50
A few months pass then lime cars come out, there are 100 made and only cost $2. Green cars price plummets down to $9 as only 30 people still want green cars.
So the only person that was profited was me and a few lucky traders that might of made 15%, everyone else lost most of there money.
This is a massive possibility with crypto. When people can own bid chunks of a single currency, anybody can make one and there is no limit on buying or selling.
How to fix the problem?
Regulation, Backing and Coins that have stable values.
People are treating these currencies like stocks, yet stocks have lots of regulation and backed by huge companies.
Massive Massive Difference
The best advice I can give is only invest in coins that have backing and that backing can grow over time.