Why some cryptocurrencies are worth $40,000, while others stay at $0.40

Feb 13, 2021 | CoinTelegraph News | 0 comments

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Market capitalization and asset supply factor into prices, but could any token be worth $1 million one day?

At the time of publication, one Bitcoin (BTC) values $47,247, while one Dogecoin (DOGE) is worth around $0.068. If you are new to crypto or markets, you may initially think: Hey, DOGE is cheaper than Bitcoin, and if it picks up enough steam, maybe it could catch up to BTC and rise over $20,000, too. This way of thinking, however, is illogical. Why? Market capitalization and asset supply. 

Market cap is the combined dollar value of an asset’s circulating supply. It changes as the value of a given asset rises and falls. Crypto metrics websites, such as CoinMarketCap, rank each cryptocurrency in order of market cap. Bitcoin is the long-standing front runner in this category, holding a market cap of about $879 billion at the time of publication.

Market cap takes each asset’s circulating supply into account. Circulating supply is the amount of any given asset freely moving around the market. Multiply the circulating supply by the asset’s price and you get its market cap.

Assets with more circulating supply often trade at cheaper prices in terms of dollar value per coin or token. BTC currently holds a comparatively low circulating supply of about 18.6 million, and even though this number increases slowly based on mining, its maximum supply is still relatively small at 21 million coins. Meanwhile, Dogecoin has a circulating supply of about 128.3 billion, based on CoinMarketCap numbers.

Given DOGE’s circulating supply, its market cap would hit approximately $800 billion if each coin were priced at roughly $6.23. Meanwhile, Bitcoin is worth more than $40,000 per coin near that same market cap due to its lower circulating supply.

Reaching a price of even $1,500 per DOGE would require the asset to have a market cap of roughly $192.4 trillion. At the time of publication, the entire crypto market has a market cap of about $1.46 trillion.

Generally, assets with low circulating supply can rise higher in price per coin than assets with large supply counts. Yearn.finance’s YFI, for example, holds a very small circulating supply of just 36,635. YFI went from approximately $900 in July 2020 to $40,000 in September 2020. A multitude of other components factor into price rises, but typically, if an asset has a comparatively larger circulating supply, its price per coin cannot be directly compared to the price of coins with a smaller supply.

Crypto assets also often hold a maximum supply programmed into their code. Each asset’s available supply grows continuously through various forms of blockchain network validation — i.e., mining or staking — until it reaches its maximum supply. Prices can dilute as coins or tokens flow into their related circulating supply, as validators tend to sell their rewards for supporting the network to pay off their costs of doing business.

What is the difference between total supply and maximum supply? “Total supply refers to the number of coins or tokens that currently exists and are either in circulation or locked somehow,” writes Henrique Erhardt in an article for Binance Academy, adding: “It is the sum of coins that were already mined (or issued) minus the total of coins that were burned or destroyed.”

Meanwhile, the maximum supply is an asset’s entire all-time supply or, more specifically, the total amount of coins or tokens that have or can be created. This means that once the maximum supply is reached, there would be no way to produce any more coins or tokens.

Understanding the concept of market cap as it relates to any given asset’s price can be important, allowing you to assess the crypto space more realistically. You may look at the price of a single Bitcoin and view it as too expensive, immediately shifting your focus toward something cheaper.

A plethora of information goes into crypto investing. Assets vary in their use cases, adoption, profit potential and associated risks, among other factors. Viewing each asset in light of its particular market cap, price and supply, however, can help in evaluating the market.

News Source from CoinTelegraph.com

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