What does market capitalization really mean in the crypto world?

When you review cryptocurrency rankings, the first thing that catches the eye is market capitalization. But do you really know what lies behind that number? Many newcomers believe it shows the actual amount of money in the market. Spoiler: it’s not.

How is market capitalization calculated?

The formula is simple: current coin price multiplied by the number of tokens in circulation. Suppose a cryptocurrency costs $10, and there are 50 million coins in circulation — the market cap would be $500 million.

Sounds logical? At first glance, yes. But this is only a superficial view of the true state of the market.

Why doesn’t market capitalization equal cash flow?

This is where most people get confused. Let’s say the price rises from $10 to $15. The market capitalization of this cryptocurrency jumps from $500 million to $750 million — an increase of $250 million.

But does this mean that $250 million has flowed into this asset? Not at all. In reality, much less capital may be needed for such a price increase. It all depends on two key factors: trading volume and liquidity.

Volume and liquidity: the real players of the game

Volume is a simple indicator: how much of the asset was traded over a certain period. Liquidity is something deeper. It measures how quickly you can buy or sell an asset without significantly affecting its price.

Imagine yourself in a market with high volume and a deep order book. There are many orders at different price levels. To significantly change the price, a substantial amount of money is needed. Such a market is less volatile — it’s resistant to manipulation.

Now imagine the opposite: a thin order book, low trading activity, low liquidity. Here, a small amount of capital can radically change the price in either direction. Whales can easily “pump” the price and, as a result, the market capitalization itself.

Practical conclusion

Market capitalization is a useful metric but not universal. It shows the relative size of a project but doesn’t tell the true health of the market. To understand the situation more deeply, always pay attention to liquidity, trading volume, and market activity. Only then can you distinguish real value from a beautiful illusion of numbers.