Confusions between Capitalization and Trading Volume

By Polkadot News 12/14/19 7:22 AM

Market capitalization is often mentioned through analyzing articles. Here is our introduction of market capitalization and trading volume in the cryptocurrency, as well as some misunderstanding between them.

What is Capitalization?

Market capitalization is most commonly used in the stock market. Similar to the stock market, the cryptocurrency market with many similarities also has the concept of capitalization.

Capitalization of 1 coin is calculated by the total number of current coins multiply with 1 coin price. For example, 1 BTC costs $5000, the total number of BTC is $16,500,000, we will have the capitalization of BTC is:

$16,500,000 * $5000 = $82.5 billion

The market capitalization is equal to the Capitalization of all coins combined. You can reference the market capitalization here.

1: Capitalization / Price / Number of coins in existence / 24h transaction volume.

2: Trading volume and market capitalization

3: The proportion of BTC capitalization to the whole market

Due to the increasing number of coins, the total market capitalization will have to be compared relatively. For example, the current market capitalization is 150 billion, the market capitalization was 100 billion a month ago, so the conclusion that the average currency increase of 50% is not correct.

We must compare the total capitalization first and then subtracting the newly added coins, reaching the market capitalization which is large enough to get the real capitalization growth on the old coins you are interested in (For example, BCH: 10 billion, OMG, IoT, etc.). It means if you are investing ETH, you should recognize that you will have a more accurate view when the market just increased to a capitalization of about $14x billion.

What is Trading Volume?

Trading volume is the volume of coins traded during the day, converted into specific units such as BTC, USD or EUR, ETH. For example, XRP has a trading volume of 300 BTC/day, the $5000 price when converted into USD we have: Vol 1-day XRP: $300 * $5000 = $ 1,500,000.

The relationship between Capitalization and Trading Volume

You will have a better overview of the market and the coin itself when determining some information as well as the close connection between Capitalization and Trading Volume.

Like stocks, Capitalization is only an estimate. For example, the market capitalization of BTC is currently $65 billion, but if we sold off to convert to cash, the most collected amount would be $20-25 billion (or much lower). Because the market could not absorb all, there are not enough buyers for that number of BTC, to sell out, the price must be extremely low to attract everyone.

The highest record ever of the BTC volume was the milestone of $4 billion/day when the price reached $4400. Thus, the total BTC trading volume at that time was only: 4 billion/ $4400 = 900,000 BTC traded, much lower than the existing 16.5 million BTC.

Not to mention, a large number of transactions are in the form of Altcoin/BTC, not just BTC/Currency (USD / EUR, JYP, etc.). In addition, many of the deals are repetitive.

So, you need to determine that the increase of BTC capitalization from 50 billion to 65 billion does not mean the amount added is 15 billion. This amount must be smaller than the volume of BTC/USD (or EUR, CNY, JPY, etc. The currencies at that time combined). You also need to know that Bitcoin or cryptocurrency is a very small financial market, not big at all. In addition, the number of volumes is divided into many exchanges which make it become smaller and smaller. Take a look at the Trading Volume plus with the amount of the new conversion to correctly conclude the added/withdrawn amount.

For example, XRP increased by $ 0.1, the volume traded 1 billion XRP, so the maximum money was added was only: 0.1 * $1 billion = $100 million. When we had volume statistics in millions of dollars (see on Coinmarketcap), which means that the amount added was always smaller than that amount, the highest is only 70%.

Large capitalization was only worthy when it was accompanied by a big trading volume. If you look at Coinmarketcap and see a 500% increase in coin, but the trading volume only 1-2 BTC, do not care about it. With such a small volume, you can ignore even it is up to 1000%, but if someone buys it, it is another story. Especially when it is only traded locally on a small exchange.

If you invest in a “trash coin”, there will be times when you understand the feeling of having no liquidity. The offered price is currently $300, but the purchase price is even just $250, meaning too much unbalanced, and if you bought a few BTC, you would be counted as a baby shark. If the coin is pushed through the pump and dump process, some of your BTC will be processed quickly, but if not, you have to spread dozens of price points if you do not want to turn your orders into a wall.

With the above information, every time you analyze the whole market, you should check the factors: Total capitalization, capitalization of coin you are interested in, which capitalization is being added to (Ex: $160 billion capitalizations, but stuffed into BTC, ETH, LTC almost), the total volume of transactions and transactions mainly on which coin, and the transaction volume of the coin you are interested in to give the most objective view of the whole market.