It is a popular trend to buy cheap coins in the cryptosphere however, it’s important that we understand the difference between cheap coins and penny stocks. Just borrowing terms like stock price or crypto price and market cap from the stock market does not make these two similar. In this article, we’ll show you how to determine the true value of an altcoin through a simple process.
Market Capitalization of a Cryptocurrency
Market capitalization in cryptocurrency is the amount of money invested in that particular coin. For example, if a coin’s market cap is $1 bn dollars, it is understood that this is the amount invested in, but this is not entirely true. When market capitalization increases, the price of every coin increases and there is no new money coming in for the coins that are sitting in yours, or anyone else’s, pocket.
We deduce at a coin’s market cap by this formula:
Market Capitalization = Coin Price x Circulating Coin Supply
and then we rearrange this formula to the following:
Coin Price = Market Capitalization / Circulating Coin Supply
Keeping the market capitalization constant is expected as the price of Coin A and Coin B will be high or low. Coins with limited supply are the rarest find and oftentimes it is the supply that determines the price action of the coin. We can understand this by considering the case of TRON and DASH. Both have similar market capitalization of 1.6 and 1.8 Billion dollars, but Tron’s circulating supply is 8000x that of DASH’s supply which is about 8.3 million coins.
If you divide the price of DASH by 8000, you will get the per coin value of Tron. This means that if we keep other factors such as market cap value and varying coin supply, then we can draw insights. 1 DASH or 8000 TRX is approximately the same because the market values them similarly.
This does not mean that HODLing 1 DASH or 8000 TRX for a few months to several years will have the same valuation over time. Why? Because, if TRX’s supply falls, the value of 4000 TRX may become equivalent to 1 DASH and the market capitalization of DASH would not support its case.
As a good rule of thumb, 10-150 million tokens, or coin supply, is considered sound for a cryptocurrency project, but there are naturally several other factors to consider before determining the true valuation of a coin. This is just a “quick fix” for the valuation of an altcoin in the moment.
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