For instance, a company with 5 million shares each with a market price of $45 would have a market cap of $225 million. For the investment community, market capitalization is used to measure a company’s size; in a takeover bid, the buyer uses the market cap to determine whether the subject of the acquisition represents good value.

Cryptocurrency Market Capitalisation

Cryptocurrency market capitalization represents the total value of the cryptocurrency. Whereas market capitalization in the stock market is calculated by multiplying the current share price with total outstanding shares, market capitalization in the crypto realm is calculated by multiplying the current price of the cryptocurrency with the total number of coins in circulation. 

Bitcoin’s market capitalization, for instance, is determined by multiplying the current number of existing coins, over 18 million, by the price of Bitcoin at the particular moment. Since the price of Bitcoin fluctuates regularly, so does its market cap accordingly, e.g., when the price of Bitcoin fluctuated between $45,000 and $55,000, the market cap ranged between $846 billion and $1.034 trillion. 

Ethereum, on the other hand, at a market price of $3,000 and boasting 117 million coins in circulation compared to Bitcoin’s 18.8 million, only had a market capitalization of approximately $351 billion. 

The cryptocurrency market cap is useful as a gauge of the potential stability of an asset. While it is notable that even crypto’s largest asset by market cap still sees volatility, it is still more likely to be a more stable investment; much in the way, a large ship can more safely navigate heavy weather at sea. In the same vein, cryptocurrencies with smaller market capitalizations are more vulnerable to market forces and stand a higher risk of extreme results, either huge returns or dramatic losses. 

Market Cap Influence

Market capitalization enables an investor to compare the total value of one crypto asset to another to make informed choices. Cryptocurrencies are categorized into three groups according to their market cap: large-cap, mid-cap, and small-cap cryptocurrencies. 

Large-cap cryptocurrencies are those assets whose market capitalization exceeds $10 billion, such as Bitcoin and Ethereum. Large-cap cryptocurrencies are generally considered low-risk by investors since they have a track record of growth. Additionally, large-cap cryptocurrencies usually have higher liquidity which protects investors. Cryptocurrency can withstand a higher volume of exodus without a dramatic price change. 

Mid-cap cryptocurrencies have market capitalizations ranging between $1 billion to $10 billion; they are considered to harbor much potential upside and considerable risk. Small-cap cryptocurrencies are crypto assets with a market cap of less than $1 billion. Small-cap cryptocurrencies are prone to dramatic swings based on market whims, with the potential for very high returns on the upside and very high risk due to the volatility. 

According to CoinMarketCap, the global crypto-assets market capitalization stands at $1.81 trillion as Bitcoin leads the way, trading at $39,150 with a market cap of $744.7 billion. In November 2021, the crypto market reached its all-time high of $3 trillion, with the two largest cryptocurrencies soaring to prices of $67,591 for Bitcoin and $4,789 for Ethereum. 

Hitting the $3 trillion milestones represented a fivefold increase in the global crypto market cap over a 12-month period, from$578 a billion in November 2020.

Law of Diminishing Returns and Crypto

The law of diminishing marginal returns is also known as  ‘the law of diminishing marginal productivity,’ or ‘the law of variable proportions.’ The law posits that adding a larger amount of one production factor while maintaining all other factors constant leads to decreased per-unit incremental returns once the system exceeds the optimal level.

For instance, in the crypto industry, numbers indicate that between October 2020 and October 2021, Bitcoin posted gains of about 45%, while Ethereum boasted gains of over 300%. However, Ethereum’s impressive gains still do not hold a candle to rival tokens such as Cardano (ADA) and Solana (SOL). Over the same 12-month period leading up to October 2021, Cardano saw gains of 1,000%, while Solana dwarfed even that impressive figure with a staggering 8,000% increase.

Ostensibly, altcoins are greatly outperforming Bitcoin, and the law of diminishing returns may explain this. Indeed, Bitcoin is the oldest crypto asset, twice the age of Ethereum, and has produced billionaires from early adopters. However, it is worth interrogating whether Bitcoin can continue to offer such returns as it ages, especially given that the project’s entire economic model itself is based around the principle of diminishing returns as block rewards halve every four years. 

Author’s Take

Despite their high volatility, small and mid-cap cryptocurrencies are more attractive to investors who can time the markets and are seeking to profit from price movements, as opposed to large-cap cryptocurrencies like Bitcoin, which offer lower returns but are much less volatile. However, despite the gradually reducing returns, Bitcoin is still delivering a healthy performance by any standards, on track with even the most bullish of predictions.