Market capitalisation – or market cap for short – is defined as the total value of an asset currently in circulation. To calculate the market cap of a publicly traded company, for example, you multiply the current share price by the total number of shares outstanding.
In the case of cryptocurrency, market cap is calculated by multiplying the total number of circulating coins by the current value of one coin. Market cap is a useful metric when comparing the size of individual cryptos to alternatives or to the market as a whole.
Some investors view a larger market cap in crypto as a sign of buoyancy in tough markets, similar to the way large-cap stocks are viewed in downturns.
Another method of gaining insight into the potential future value of a crypto is to calculate what is referred to as the fully diluted market cap. So what does a fully diluted market cap mean?
The definition of a fully diluted market capitalisation is the total value of the crypto at today’s price if the entire future supply of coins were in circulation. Let’s take bitcoin (BTC) as an example.
Each time a bitcoin block is successfully mined, new coins are minted. At the time of writing, the number of bitcoins already mined and thus in circulation was approaching 18.8 million (as of 26 August 2021). The source code of bitcoin stipulates that the maximum number of coins that can ever be created will be capped at 21 million. In the case of bitcoin, the difference between market cap and fully diluted market cap is illustrated below.
Market cap = 18.8 million x current price of 1 BTC
Fully diluted market cap = 21 million x current price of 1 BTC
Market cap and fully diluted market cap in crypto are often used to rank the relative popularity and importance to the overall market of particular coins, in much the same way as it is used to rank publicly traded companies.
While applying the fully diluted market cap can be quite useful when evaluating established cryptos, investors should use multiple metrics when determining the right crypto to invest in. A new coin could inflate its fully diluted value simply by allowing for a huge number of future coins.
In the same way as when a public company releases huge volumes of new stock, this will likely not lead to higher prices per unit, but will increase inflationary pressure on the coin, thereby causing the value per unit to decrease. Fully diluted market cap is useful in examining the total value of a crypto asset to itself over time, however.
Consider bitcoin, for example: while the supply has increased steadily to reach 18.8 million, the fully diluted market cap has increased substantially more in comparison to the increasing supply. This metric illustrates that investors feel the future value of bitcoin may increase rather than decrease.
