Crypto Market Cap. Why Learn It before Taking Crypto Loan?

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Crypto Market Cap is the total value of all coins in one network — for example, the market cap of Bitcoin is $570 billion, which means all Bitcoins taken together have this price.

Why is market cap important in cryptocurrency? It is a tool to compare the significance of different cryptocurrencies. The price is not a good indicator here — for instance, 1 Cardano costs only $1.24 at the time of writing, but it’s the 5th coin by market cap. In the meantime, Filecoin that costs $48.99 is only ranking 24. A coin’s blockchain market cap better reflects the network’s value than the price. 

Cardano ADA and Filicoin FIL Price Chart

Also, the market cap allows assessing how a crypto coin performs. If you look at the market cap graph and see that the coin is volatile, it means that putting this asset as collateral for a crypto loan might be risky — you can end up losing your coins. Further, we will explain why, but firstly, let’s see what the crypto coin market cap is. What does cryptocurrency market cap mean?

How is the market cap defined? Crypto Market cap explained

Market cap = Circulating Supply * Price of this coin. 

Circulating supply is how many coins there are in the market right now. For instance, Bitcoin’s circulating supply at the time of writing is 18,757,062 — it means that this many Bitcoins exist out there at this moment. In the case of BTC, the circulating supply increases every 10 minutes by 6.25 Bitcoins issued as a reward for mining a block. 

In most cases, a market cap directly correlates with a coin’s price. Let’s go to CoinMarketCap to see the Bitcoin cryptocurrency market cap graph: 

Bitcoin cryptocurrency market cap graph

And here is its price chart:

Bitcoin Price Graph

If a coin’s price is growing, so is its market capitalization — according to the equation 

Market cap = Circulating Supply * Price of this coin.

But if a coin’s price is low, it doesn’t mean that its market cap is also low: the circulating supply can be very big. For instance, XRP costs $0.7 as of June 2021 compared to Bitcoin’s $35,000, but stands at the 6th position by market cap. This is because its circulating supply exceeds 46 billion coins, while in Bitcoin, there are only 18.7 million coins in circulation.

Why is market cap important in crypto?

Market cap defines how high a cryptocurrency is ranking among other cryptos. The higher a coin is ranking, the more popular among cryptocurrency users it is. Sometimes, but not always, the market cap shows how strong a coin’s impact on the industry. 

Bitcoin is the Top-1 coin by market capitalization and has always been so. There’s even an indicator showing the ratio of Bitcoin’s market cap to the market cap of all other cryptocurrencies (altcoins) — Bitcoin dominance.

Ethereum is the second crypto by market cap. BTC and ETH have shaped the Top-2 for a very long time, while the Top-10 is changing rapidly.

Why should I learn market cap before getting a crypto loan?

Before taking a crypto loan, choose what coin you want to use as collateral. Typically, you would pick a coin that fits the following criteria: 

  • This coin is available right now in your portfolio;
  • This is your long-term holding and you don’t want to sell it now;
  • You are ready that this coin will be unavailable for use during the loan period;
  • You expect this coin to rise in price;
  • You are sure this coin won’t drop in price significantly, which would mean losing your collateral.

Evaluating the market cap of a coin is essential for the last two criteria. Firstly, you’d want your coin to rise in price because when you repay the loan, we give it back to you at its current rate — as if it has been stored in your wallet. 

Secondly, if the price of the asset drops dramatically, you will lose the collateral. Let’s see why.

At CoinRabbit, we give you the crypto loan at a 50% loan-to-value ratio. If you deposit 1 BTC, we will send you a Tether worth 0.5 BTC. This may look not as cool at the first glance, but it makes your collateral much safer. 

The 50% LTV means that we will sell your collateral if it loses 50% of its market price. Cryptocurrencies are volatile, but there are few coins that can potentially show such a dramatic decline in the foreseeable future. If our LTV were 90%, we would give you a 0.9 BTC-worth loan for 1 BTC as collateral, but we’d have to sell your Bitcoins if they lost only 10% of their value. Not a cool perspective. 

But how does that relate to the coin’s market cap? 

How to analyze cryptocurrency market caps before getting a crypto loan?

Before choosing a coin to set as collateral for your crypto loans, look at its market cap graph. If you see significant fluctuations in a short period of time — 40% and more, this might be a risky coin to choose as collateral. 

Dogecoin Price graph

Or at least, you should be ready that the price of this asset can rapidly approach the liquidation price (coin price at the time of the deposit minus 50%), and we will warn you that your collateral is at risk. 

For instance, Bitcoin and Ethereum can lose 20-30% in price over a few days, but there are very few experts who expect them to plunge below 50%. Other assets, however, may be more volatile in certain periods of time. For example, DOGE has already dropped more than -40% over the last month.

One more thing — it’s good to take a loan when a currency is supposed to be at the bottom. If you take it here and the coin starts to grow, there’ll be less risk of liquidation for your collateral.

How to compare crypto market caps?

Open CoinMarketCap. To compare the market caps, choose different assets and see their market cap charts.

If the graph shows high volatility and that the current market cap is at the top for this asset, the risk of collateral liquidation for this coin will be higher. If the graph is smooth and the market cap is at the bottom, the risk is lower.

Ethereum Price Graph

We hope this guide answered your questions — what does market cap mean in crypto, what is a market cap in cryptocurrency. Now you know how market cap affects cryptocurrency, how to analyze cryptocurrency market cap, and how to calculate crypto market cap. Choose safe assets to deposit as collateral, and may your funds stay secure!

Not financial advice. Do your own research and take everything moderate.

Crypto backed loans have their own risks that should be taken respectively.