Mon Jun 05 2023
While market cap can be a good indicator for adoption, it can easily be faked to trap investors into illiquid markets. Here's what market cap actually stands for and how to responsibly use it as a trading indicator.
![Market Cap](/img/blog/market cap/market cap-explained.webp)
In recent years the world of cryptocurrency trading has evolved significantly, with algorithmic cryptocurrency trading platforms such as Aesir becoming increasingly popular. Today, investors are turning towards crypto trading bots to navigate the volatile crypto market more efficiently. This article delves into how market capitalization, a critical factor that helps measure cryptocurrency adoption.
Market capitalization, commonly used in both stock and cryptocurrency markets, is a crucial metric for algorithmic trading strategies. In essence, it represents the market value of a particular cryptocurrency or a blockchain network. Market caps of individual crypto projects and the overall crypto industry are invaluable parameters for both manual as well as algorithmic trading strategies, but they’re not all encompassing metrics and it’s good to understand what they represent, and more importantly, what they don’t.
Crypto trading bots calculate the market capitalization of a cryptocurrency by multiplying the circulating supply of the asset by its current unit price. For instance, in a hypothetical situation, if there is a cryptocurrency named AliceCoin with a circulating supply of 1,000 coins, and each coin is priced at $100, the trading bot would calculate the market cap as $100,000.
The market cap of a cryptocurrency is calculated by multiplying he circulating supply of the asset by its current unit price. For instance, let’s say you made a coin called YourCoin with a circulating supply of 1,000 coins and each coin is priced at $100. The market cap of YourCoin would be $100,000. So in a sense, market cap could be used as an indicator of an assets’ adoption.
However, it’s important to note that market cap alone is not enough to determine adoption, and can be a deceiving indicator at times. Let’s say that instead of $100, YourCoin is valued at $100,000. The way this could work, is you ask your friend to buy a small amount of YourCoin. Let’s say your friend pays $10 for 0.0001 YourCoin, bringing the price per unit up to $100,000. Congratulations, you now have a market cap of $100,000,000 without any liquidity.
This example shows the risk of reading too much into the market cap itself. It can be a good indicator, but especially when used to make decisions regarding lesser known altcoins, traders need to ensure that enough trading volume and liquidity is present to avoid a potential scam or rug pull.
Total market capitalization denotes the combined value of Bitcoin, altcoins, stablecoins, and other crypto assets. Crypto trading bots can use this figure as an indicator of the industry’s overall size, helping them determine the investment potential of a crypto asset. However, there are likely other indicators to use in order to determine market trends.
This is calculated by multiplying the current price of an asset with its maximum possible circulating supply. In the case of Bitcoin, the market cap at the time of writing is $526,046,670,660, while the fully diluted market cap is $569,807,563,476. That’s because one is calculated based on the current circulating supply of Bitcoin: 19,390,718 BTC, while the other is calculated based on the maximum supply of 21,000,000.
Trading bots also factor in the prospect of deflationary tokens, which refers to certain cryptocurrencies that reduce their supply over time through coin burn processes. If the value of such an asset does not increase over time and its supply keeps decreasing, its future diluted market cap could be lower than the current one, presenting a unique situation.
In conclusion, market capitalization can be a good indicator the potential that an asset has, but should not be directly used as an indicator for an asset’s success or adoption. If you’re planning to build a cryptocurrency trading bot that uses market cap as an indicator, please ensure that you use appropriate confirmation signals to avoid rug pulls or projects that artificially inflate their market cap to trap investors into locking liquidity in low volume assets.