If you missed our introductory article on market cap, you can catch up at this link.
How is Market Cap useful?
The Market Cap of a currency tells you the risk rate you are facing when choosing to invest in a cryptocurrency.
There are 3 Market Cap tiers that cover all cryptocurrencies, which correspond to 3 different risk levels.
Large Cap (over $10 billion) – Low Risk
Mid Cap ($1 billion – $10 billion) – Medium Risk
Small Cap (less than $1 billion) – High Risk
Large Cap – Low Risk
Cryptocurrencies that have high market capitalisation, i.e. more than $10 billion, are safer investments than those with medium-low capitalisation.
Why is that? It all comes down to math. A market with such a high market capitalisation has very high volume* and liquidity*, so it is difficult to manipulate. This means that even if huge amounts of money are moved, its market remains fairly stable.
Volume* = number of transactions in a specific time frame
Liquidity* = availability of coins for a purchase or sale transaction. The higher the liquidity of a cryptocurrency, the faster the transactions and the weaker the impact on its market price.
To this day, only 3 cryptocurrencies are in this tier: Bitcoin (BTC), Ethereum (ETH), Ripple (XRP).
Investing in a cryptocurrency of this tier tends to provide a gradual and more conservative growth or decrease than the other tiers. These 3 cryptocurrencies are usually chosen by those who prefer to make a long-term investment.
It is important to consider that volatility (i.e. positive and negative price variability) is a common attribute of all cryptocurrencies. Therefore, it is possible that the price may fall after your purchase, resulting in a loss on your investment. However, the loss tends to be smaller compared to the other 2 tiers. As these markets are more stable, the price decrease is also gradual.
Moreover, the popularity of these cryptocurrencies is such that over the years there has been a steady growth in their value. In this regard we recommend you to read the article Bitcoin, the best investment of the decade.
Mid Cap – Medium Risk
Cryptocurrencies of this tier have a lower market capitalisation, between $1 billion and $10 billion, but higher growth potential.
They include, for example, Bitcoin Cash (BCH), Litecoin (LTC), EOS (EOS), Tether (USDT), Tezos (XTZ), Cardano (ADA) and Monero (XMR).
Investing in these cryptocurrencies increases your exposure to risk but at the same time allows you to generate a higher profit margin over the medium term. These cryptocurrencies are well established, but have not yet expressed their full potential and could increase their market or usefulness.
Small Cap – High Risk
These cryptocurrencies have the lowest market capitalisation and the highest risk rate because the chances of failure of the project that launched them is much higher.
Therefore, if it is true that their price may collapse from one minute to the next, in the same way, it could explode, generating huge returns on your investment. Cryptocurrencies with small caps are also the cryptocurrencies most vulnerable to the so-called Pump and Dump. Read the article to find out how this kind of scam works.
These include Neo (NEO), Cosmos (ATOM), Zcash (ZEC), Dogecoin (DOGE) and others. They are mostly classified as short-term investments.
Find the right combination
Every investor who calls himself such should know the main rule of this activity: differentiate.
A good mix of these 3 tiers will allow you to reduce your risks (NB. but not eliminate it completely!) and benefit from all the advantages of the different markets.