When surveying the cryptocurrency market landscape many beginners often misinterpret the relationship between supply, price and market cap.
As we’ve just explored, market cap is a great indicator of a project’s market size and it can be calculated by multiplying the number of tokens in circulation (supply) by the current price of a single token.
Some of the most common misconceptions beginners have when they enter this space include:
Not only are these misconceptions false, but they’re also dangerous. This is where the relationship between supply, market cap and price is important to understand.
To better understand the relationship between supply, market cap and price, let’s look at an example of two tokens that currently have a very similar market cap (market size or value), but have distinctly different prices and circulating supplies.
|Bitcoin Cash (BCH)
|Binance Coin (BNB)
*This table is for example purposes only and does not reflect current market cap, circulating supply or price.
In this example, Bitcoin Cash (BCH) and Binance Coin (BNB) have very similar market caps, indicating that each has a similar level of associated risk, upside or growth potential and volatility relative to the market.
Despite both tokens having a similar market cap, the price of BCH is almost 8 times greater than that of BNB. The key difference here is circulating supply. BNB has almost 8 times as many tokens in circulation as BCH, and despite the value of each market cap being roughly equal, a beginner could potentially make the mistake of assessing that there is greater upside potential in BNB simply because it’s price is lower.
In this way, we can see that our primary focus when evaluating the risk and growth potential of a token is its market cap, whereas the circulating supply provides context for understanding the difference in price between equally valued tokens.