2-Minute Explanation: What exactly is "market cap"
While checking out a few forums, it seems like laypeople in the cryptocurrency sphere are misunderstanding what market cap (or "market capitalization") actually means.
Allow me to explain.
Bitcoin's market cap is currently at $45 billion at the time of writing.
That does not, however, mean that $45 billion have been invested into Bitcoin. That figure may actually be higher, or indeed, lower.
Instead, market cap is quite simply the price of the token multiplied by the number of tokens in circulating supply.
That is not the same as the total amount invested in the token.
Let's use a really simplified example to illustrate this point:
Imagine you have a fictious token (ABC).
For sake of simplicity, there will only ever be 2 ABC tokens in existence.
Trader 1 purchases the first token for $10.
Trader 2 purchases the second token for $15, believing that the higher price is acceptable because of the token's special use case.
The listed price of the token will be the most recent price, $15.
This will mean the market cap is $30 ($15 x 2 tokens in supply).
However, as you can see, in this example, only $25 have actually been invested in the token in total ($10 + $15). This is the distinction I would like to highlight with this post.
I hope that explanation helps! Feel free to add to it in the comments below!
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Much easier to understand now. Thank you!
No problem! I'm glad you found it helpful!
I think a lot of people mistake the market cap for the circulating supply
Indeed, a lot of people including journalists! It's an easy mistake to make, to be fair.