In this article, we are going to look at the two largest cryptocurrencies by market cap, and discuss both the factors at play as to why, but also the importance of relying on additional metrics to make a purchasing decision in this space.
An important metric to determine when purchasing cryptocurrency is the market capitalization (or cap). While this factor is important, please note, when purchasing in this asset class to consider other important investment factors. At a minimum, some factors to include with one’s decision is to analyze the volume, technical trends, previous price, use cases, and non-circulating supply.
You can determine the market cap with an easy to remember calculation. To find this, take the current price and multiply this by the number of coins in circulation (Market Capitalization = Current Price x Circulating Supply).
Over the previous ten years, several hundred billion dollars have entered the cryptocurrency space. Per a popular source for Crypto research, CoinMarketCap[1], there is $430.34 Billion in the crypto asset class, with 7,600 cryptocurrencies.[2]
Before we get started, it will be beneficial to address non-circulating supply, because this is such an important factor when understanding market cap. Many cryptocurrencies have large amounts of crypto that have not been mined yet or released from the early adopters/founders. This can dramatically impact the price of the currency downward once the crypto is released on the exchanges.
It is important to know how much circulating, non-circulating supply there is at a specific point in time, but also long term whether there is a hard-coded finite supply or an infinite supply.
Forehand Financial
Below, please see the top two most popular cryptocurrencies by market cap!
- Bitcoin (BTC) – Since Bitcoin was launched at the beginning of 2019, it has been the most widely used with the largest market cap.
The supply of Bitcoin is finite.
With the circulating supply being $18,536,750 and the current price being $14,908.68, this has a market cap of $276B which is 5.57X higher than the second coin by market cap. There are many reasons behind this price point, and a major reason for this high market cap is because of the limited total supply.
What are the major factors at play in driving up the price? Plain and simple, the primary factor is scarcity. As mentioned, currently there are ~18.5M BTC in circulation. The total available supply is 21M. Something important to note is that these remaining 2.5M Bitcoins are becoming progressively harder to mine.
The way one could look at it would be digging into the earth with a shovel. At first, it is easy to dig into the soft moist ground, as you dig deeper the earth gets harder and colder which makes it makes one much slower at digging. Eventually, around a thousand meters deep, you hit bedrock which is extremely thick and next to impossible to dig through. With Bitcoin, approximately every two weeks, the mining difficulty increases to ensure the stability of the verified blocks in the blockchain, thus fewer rewards per week, and eventually, Bitcoin mining will not be profitable anymore from a production standpoint.
Besides just scarcity, there is quite impressive liquidity, an ever-growing acceptance of it as a payment method, privacy, and independence from any central agency. While this is not every factor, most of these factors help drive up bitcoins value.
Bitcoin is a haven asset for countries experiencing hyperinflation.
While we know Bitcoin historically has had many dramatic swings, and many critics don’t look at it as a store of value, relatively it is stable, many countries such as Zimbabwe, Venezuela, or South Sudan stand to benefit significantly from the adoption of Bitcoin.[3] Each of these countries has experienced significant hyperinflation. Even with 20-50% swings in bitcoins value, these countries stand to benefit from the adoption of Bitcoin because you cannot just print more bitcoin, but central governments can always print more fiat currency.
From inception to present, Bitcoin has remained at the top in popularity by market cap. Entire books, articles, and research papers have been written on the countless use cases of bitcoin, and many calling it the digital form of gold. But unlike gold, the market cap for Bitcoin can be potentially more volatile, like we saw in the crash of December 2017 shedding hundreds of billions of dollars of value.
Debates can be made on both sides on the future of Bitcoin’s use as an everyday currency, but at this time, and the foreseeable future it will be the leader from a market cap perspective because of its current market price, wider vendor acceptance, and scarcity of coins available.
2) Ethereum (ETH)
In February 2016, Ethereum (ETH) took the second-place token by the Market cap.
Foremost, how scarce is ETH (the token sitting on top of Ethereum)? This is important to note because many often confuse the difference from the platform Ethereum versus the cryptocurrency ETH. We commonly understand it that there are 21M Bitcoins that will be or are in existence, but how much ETH is there, or will there be?
At this time, the supply of ETH is not finite, but this can change with further iterations of the protocol.
ETH never set an upper limit on the total coin supply to be mined. What this means is inflation might occur at points in the future, and the asset is not as scarce as Bitcoin. This is an important point to bring up from a market cap perspective because more supply can be rolled out through mining. If more supply gets rolled out, and there is not as much demand, it will harm the price thus lowering the market cap.
Looking at the current price and circulating supply we have 113,332,093 ETH circulating at $437.46 per coin. The total market cap of Ethereum is $49.577B.
With an impressive market cap, what gave ETH the trajectory to achieve second on our list in terms of most popular cryptocurrencies by market cap? What drove larger-scale adoption to the usage of Ethereum?
Ethereum’s protocol has numerous use cases and adoption amongst many important stakeholders.
Ethereum was built to address many of the things that Bitcoin could not do or was not programmed for. The most widely known and well-accepted uses of Ethereum would be the use of Smart Contracts and dApps(decentralized application). Having this functionality has helped propel Ethereum in popularity because it increases the use cases several times over. Use cases involve everything from market predictions, legal contracts, financial contracts, crowdfunding, web hosting, and more. With all these use cases, large banks, developers, individuals, and institutions alike are using the protocol’s technology to drive the adoption of the Ethereum network, which drives the price up higher.
The secondary function of Ethereum is the use of the cryptocurrency ETH, but since it is not as widely accepted across vendors, this is not the primary use case. Unlike Bitcoin, it can be a challenge trying to find those who accept the ETH currency. A route many holders of ETH take would be to convert ETH into BTC to make a purchase or to just move into cash.
Ethereum also has adoption through diversification, correlation trading, and retail investors.
Something that is not as investigated with Ethereum is the spillover from Bitcoin by retail investors. This plays into increasing the market cap because if investors see the price of Bitcoin go up, correlated assets are another way to capture upside potential. The correlation between BTC and ETH remains positive averaging 50% over a year’s time frame (correlation coefficient). While the correlation can swing dramatically, on average, the prices have a generally positive correlation in the long run.
Also, with the rise in the adoption of cryptocurrencies, many individuals purchase altcoins to diversify and speculate on different products that may take off. Since Ethereum is listed at the top of many exchanges, and it has the power of network effects, without doing ample research, many individuals drive up the price and market cap just through speculation.
Nevertheless, it is without a doubt that Ethereum has earned its place as the second-largest crypto by market cap. With the adoption of smart contracts/dApps, with countless use cases, adoption, and use by larger institutions, this protocol will be here to stay and even evolve into further iterations such as Ethereum 2.0.
My call to action to everyone today is to look at market cap as an important investment criterion, but it needs to be analyzed through several other factors concurrently.
Forehand Financial
When trading stocks, one will not base a decision solely on the price, it is important to understand how all the factors work together. There are currencies out there with very large market caps but under $1,000 trading volume a day. By just looking at the market cap, one may think a coin has a strong foothold in the cryptocurrency space, but often you do not want to trade coins with such low volume because liquidating can be very challenging, but also, these projects have the potential to be scams.
While Bitcoin and ETH reign at the top of cryptocurrencies by market cap, only time will tell if they hold the top two positions well into the future. While these coins are not without their flaws, the network effects are critical when it comes to the mass adoption of a new currency to replace or coexist with fiat money. The cryptocurrency space is still young and evolving, and with the underlying technologies and unique characteristics of these two coins, many are confident they will hold their dominance for years to come.
Key Points
When looking at the market cap, please try to remember the points below:
- Market Capitalization = Current Price x Circulating Supply (MC= CP x CS)
- Bitcoin & Ethereum Market Cap = Bitcoin has the second-largest Market Cap at $276.35B, and Ethereum has the second-largest Market Cap at 49.577B
- Supply = Identify both circulating and non-circulating supply, and long term whether there is a hard-coded finite supply or an infinite supply
- Price = Realize the factors that drive up the price on the cryptocurrency being analyzed
- Interconnected Factors = Know how each factor plays into each other (Price, Market Cap, Supply, Volume, Etc.)
- Unique Crypto Characteristics = Each cryptocurrency has unique characteristics that give it unique qualities, do your best to understand the protocol and what sets one apart from another
Do you think Bitcoin and Ethereum will stay at the top in the popularity of cryptocurrencies by market cap? Please feel free to let us know in the comment section below.
Resources
[1] https://www.coinmarketcap.com/
[2] Data Pulled as of September November 7th
[3] https://news.bitcoin.com/venezuela-bitcoin-use-hyperinflation-crypto-adoption/#:~:text=The%20firm%20elaborated%3A-,The%20country%20has%20reached%20one%20of%20the%20highest%20rates%20of,preserve%20their%20savings%20against%20hyperinflation.
Disclaimer:
Nothing stated in this article is a recommendation from Forehand Financial to buy or sell a particular security or asset class. You should wisely consider your tolerance for risk, time horizon, and financial goals before making an investment. With investing, you run the risk of losing money, always read an investment prospectus and make an informed decision before allocating capital to a particular investment.
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