In the Crypto market, a mathematical technique is used to determine the value of the currency. The value of the currency is called Market Capitalization or cryptocurrency market cap. The value is seen as the real indicator of the coin, as prices fluctuate for many reasons. Every good or bad news has a positive or negative impact on the prices of the currency in the market. The concept of value can be understood from a very basic example if you buy a sandwich at $10 and it tastes the same as the sandwich you at $20. That means, the sandwich you bought at $20b did not offer you any additional value. That’s the reason price is not the most accurate indicator of value. The added cost might and might not increase value. There are so many variables that trigger price fluctuation; in short term investor psychology can lead to big variations. The impact investor psychology can substantiated by much talked about Thanksgiving effect.
Investor Psychology and Thanksgiving effect
To get a better understanding of how cryptocurrency market cap works, you need to have a good idea of how and what affects the price. The Thanksgiving effect is a very example of how investor psychology can dictate the boom and bust phenomenon in the short term. The theory of the Thanksgiving effect came into the scene in 2017. And a lot of experts believed in this theory and supported it by saying Bitcoin really benefited from it.
The underlying idea when people go home on Thanksgiving, they have a good, they meet their loved ones, their friends and family feel good about everything they see around themselves. That feel-good factor has a lasting impression on them. They start to feel good about their professional prospects as well. They invest more; in this case, they invested in Bitcoin. So Bitcoin saw a surge in their crypto market cap post-Thanksgiving 2017. If you want to have a firsthand experience of these interesting variations, you log on to crypto charts.
How is the crypto market capitalization different from the stock market?
There isn’t a substantial difference between how stock markets and cryptocurrency markets decide market capitalization.
- The major difference is in the identities.
- Stock markets decide the market cap of a company by multiplying existing shares to the current price.
- The cryptocurrency market cap is decided by multiplying the total current coins to the current price.
The categorization of the market
In stock market, companies are categorized according to their size of market cap, as small-cap, mid-cap and large-cap.
- Small-cap companies usually present more risk because they are more prone to potential failures. But you’ll always get better yields if you invest in small caps. If they succeed, they will yield you big rewards.
- The likes of Apple, Amazon and Walmart are categorized as large caps. If you are looking for stability, you go for large-cap companies.
This categorization of companies gives you a very good idea of the risk profile of companies. The scenario is totally different in the crypto market.
Market Manipulation and projections
Market manipulation is very common in the cryptocurrency market. You will see small market caps lending themselves to market manipulation. Large caps also do that, but very frequently. There are many bad actors also involved, which exploit the cryptocurrency market cap, especially the small caps, by controlling the supply of coins.
All these factors tell us cryptocurrency market capitalization does not provide any vital information. You can’t make future projections looking at the supply of coins. You can even go on to say; nothing defines the future supply of coins. It’s the code that will determine whether the system will mint the coin or not.