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:
- “1 BTC is currently $10,543.50 USD, I can’t afford that! I’m going to find a token I can afford.” – Many beginners think that in order to invest in a token they need to acquire whole tokens, which is fundamentally incorrect as it is possible to buy either whole tokens or portions of tokens.
- “BTC is already expensive, I’m going to invest in something that has more potential to grow.” – Some beginners think that tokens with a lower price offer a higher potential for future growth. Whilst many lower priced tokens may have plenty of future growth potential, many beginners fail to understand that price is not actually a determining factor when it comes to future growth potential at all.
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.
|Market Cap||Circulating Supply||Price|
|Bitcoin Cash (BCH)||$4,091,182,561 USD||18,534,231 BCH||$220.74 USD|
|Binance Coin (BNB)||$3,985,196,441 USD||144,406,560 BNB||$27.60 USD|
*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.