Why Investors Consider Low Cap Crypto as Gold Mines; and why it could also fail.
The creator of bitcoin Satoshi Nakamoto intelligently built an economic system that functions like the Gold mining business. Man will have to work, expending energy and time to gain profit in the form of gold, and bitcoin in the case of crypto. Sometimes the activity doesn’t go in favour of the miners and as such, they incur losses which impact their operations.
Cryptocurrency, the first and most popular application of blockchain has attracted several stakeholders of the global financial system. The ingenuity in the design of cryptocurrencies presents a fascinating starting point for financial players to learn how to better serve the newer generations that do not wish to rely on buggy, old and slow financial systems as the world moves in flashes before them.
Cryptocurrency has also caught the attention of global and national regulators. This is very much reflected in the FATF regulation of cryptocurrency exchanges and the development of Central Bank Digital Currency (CBDC) many other events.
The year 2016 and 2017 say the magnificent rise in the price of cryptocurrencies with bitcoin exceeding $20,000 in some crypto markets while other alternative coins (altcoins) gave some impressive returns even far better than Bitcoin. This is widely referred to as the Bull Run of 2017.
Some believe there will be a bull run in 2020, others do not share the same sentiments.
But how are crypto investors making great profit even without a 2017 crazy-rush? Savvy crypto investors take a considerable amount of time to evaluate possible investment options to make good choices. Amongst several key metric investors use to evaluate cryptocurrencies for investment such as Liquidity, is Market Capitalization plays a serious role in determining the when, if and why of investing in cryptocurrencies.
What is Market Capitalization?
Market capitalization or market cap as it is normally called is a metric used in measuring and comparing the size of a cryptocurrency. The market capitalization of a cryptocurrency is arrived at by multiplying the price of a cryptocurrency by the total number of the coin/token in circulation.
A simple example is XYZ Coin, currently priced at $4/per coin and having a total supply of 50,000,000 XYZ coins with 10,000,000 coins in circulation (i.e tradable and transferable at the moment). The market capitalization of this XYZ therefore becomes $40,000,000 ($4 * 10,000,000)
Why Market Capitalization is Important?
The crypto market is filled with thousands of cryptocurrencies with each doing something or nothing. But why is market capitalization important to investors besides other crypto evaluation metrics?
Market capitalization as said above is used to measure the size of a cryptocurrency. This is why crypto market aggregators like CoinMarketCap list cryptocurrencies in the size of their market capitalization. The largest being bitcoin is at the top and is followed by Ethereum. Bitcoin’s market cap trumps several of the other cryptocurrencies combined together.
The size of a coin’s market cap is important to investors because it allows them to evaluate and decide if a cryptocurrency will give enough returns.
Low cap cryptocurrencies are gold mines for investors because, since their market size is low, these coins have enough potential to give amazing returns as the market capitalization grows with time.
A simple description of this is a farmer purchasing 100 chicks for $200 ($2/Chick), and rearing them till they are table size with a market value of $20 per chicken. The chicks had gotten fed and grown in size via investment of the farmer in feeds and drugs by 10 times their original size.
This is similar for cryptocurrencies for investors. Small Cap coins have the potential to turn an investor’s $1000 investment to $10,000 than buying coins with large market caps. The volume of trading needed to increase a coin from $0.01 to $1 is quite smaller than the volume needed to push a coin’s price from $5,000 to $10,000.
Small caps coins are gold mines for investors. Maybe not.
Why Market Capitalization as a metric could fail an investor
The market capitalization metric measures the market size of a cryptocurrency and it’s important for comparing cryptocurrencies. However, the metric is just a market size measurement metric. It doesn’t measure real value. This is arguable because the value if reflected in the fundamentals of a cryptocurrency and this ultimately pushes the market price and cap of a cryptocurrency yet, cryptocurrencies has been known to be speculative.
The bull run of 2017 saw the hype that has never been seen before in the cryptocurrency industry and these resulted in the creation of high market cap cryptocurrencies from tiny caps they had.
When the bear market came, many of these high market cap cryptos saw an unimaginable crash in price and market cap. Also, not all low cap coins will really generate good returns. Some cryptocurrencies will not increase significantly in price because of several factors.
This is therefore why market cap as a metric should not be used alone; however, low cap cryptocurrencies present a fascinating opportunity for crypto investors to make the “lambo” type of gains if things work out well.