Bitcoin capitalization and what they eat it with
To evaluate the cryptocurrency market, the term “capitalization” is increasingly being used. Bitcoin capitalization is growing - what does this mean? Is it good or bad? And what does capitalization growth mean for the average user?
What is cryptocurrency capitalization?
The term “capitalization” came to the world of cryptocurrencies from economic science, where it has several meanings, most of which have nothing to do with the world of cryptocurrencies. For example, capitalization is the migration of part of profit into additional capital, which allows you to increase your own funds and reduce borrowed funds. Capitalization also refers to the value of the company, which is calculated on the basis of current and fixed assets or based on annual profit.
The most suitable definition for the world of cryptocurrencies comes from the stock market:
Capitalization is the value of an asset based on market value.
For example, for Bitcoin this means multiplying all mined coins by the market value of one Bitcoin. As of today, Bitcoin's capitalization has exceeded $255 billion.
Is the growth of Bitcoin capitalization good or bad?
At first glance, it's certainly good. After all, it was built according to a deflationary model, that is, the number of coins in circulation cannot exceed 21 million, and taking into account the inevitable loss of some coins and their withdrawal from circulation, even less. Consequently, an increase in capitalization also means an increase in the value of the coin, which is an absolute plus for all Bitcoin owners.
On the other hand, the rapid growth of crypto coins gives rise to an unpleasant consequence. The coin must be used for settlements, for which it must be freely exchanged and accepted for payment. There are no problems with exchange; anyone can exchange their coins for regular currency or other coins on specialized exchanges. Payment is much more complicated - even Bitcoin and , the two undisputed leaders of the crypto world, are used in a rather narrow segment of the market, primarily in online trading, while other crypto coins are traded almost exclusively on exchanges.
Let's go to the real economy!
In order for cryptocurrencies to become full-fledged instruments of monetary circulation, they must be included in the calculations of the real economy; we already wrote about this earlier, when we calculated the possible .
But the rapid growth of Bitcoin’s capitalization raises a fair question: “Why part with a coin if its value is growing by tens and hundreds of percent per year?” Such a profit cannot be obtained on ordinary tools. Neither a bank deposit, nor the stock market, nor even the forex market are capable of providing such high rate arrived.
Consequently, Bitcoin, like other coins, is at the current stage just an investment instrument that allows you to quickly increase your savings. At the startup stage, such a sharp increase in cryptocurrency capitalization is justified and desirable, since it serves as a payment for risk and covers the costs of putting a new coin into circulation, sometimes quite significant. However, delaying the transition to real spending increases the risk of a collapse in value in the future, since a coin that is not used in the real economy may be replaced by other, more advanced coins, which are based on an improved code.
Bitcoin is still the undisputed leader, its capitalization is 56% of the total capitalization of the crypto market, but back in February its share exceeded 85%.
Share of Bitcoin in the total capitalization of cryptocurrencies
The absence or delay of the transition to the real economy can provoke a deep correction in the value of the coin, and therefore a decrease in the capitalization of cryptocurrencies - after all, it will be increasingly difficult to explain the exponential growth in value only by the possibility of future use.
Thus, fast growth capitalization of cryptocurrencies and Bitcoin, in particular, has both positive and negative sides. From the point of view of the survival of a cryptocoin, it is necessary that after a period of rapid growth at the initial stage, the growth of capitalization should be smoother, gradually decreasing to 20-30% per year. Such growth will allow the coin to remain an attractive investment instrument, but at the same time the wave of hype will decrease and involvement in the real economy will increase (first Bitcoin, Ethereum, and then other cryptocurrencies that will gain popularity and complete the initial stage). This will ultimately give a win to all coin owners over the long haul.
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Capitalization is usually called the value of all assets that are in circulation. On traditional trading platforms, the role of the latter is played by various papers owned by public organizations. In the case of electronic money, this indicator indicates the total value of all issued coins that are present on the market. In plain language, capitalization is the total value of a particular virtual currency in the world. As a rule, this characteristic is expressed in dollar equivalent. Unlike the algorithm for calculating the value of assets on stock exchanges, a different mechanism is used to determine the capitalization of digital coins. In the first case, turnover on exchanges is taken into account, in the second - total number created coins.
For investors, the capitalization of cryptocurrencies is one of the most important indicators. The higher the so-called ceiling of a coin, the less susceptible to outside influence its value (less volatility). So, in order to move just a few points, a whole series of multi-billion dollar transactions will be required. While even the activity of ordinary players can significantly affect the price of new tokens.
You can also look at the level of capitalization on various specialized services. However, according to experts, one should not completely trust such resources, since they only show an approximate picture. This happens because their algorithms do not take into account the actual turnover of crypto coins, but the number of funds generated. At the same time, they neglect various losses associated with computer equipment. In addition, the inaccuracy in the testimony is associated with the “disappearance” of one million Bitcoins, which Satoshi Nakamoto allegedly left for himself during the formation of the site. Experts have found that a total of 3 to 5 million tokens are considered “lost forever.”
In the past year, the total capitalization of cryptocurrencies was marked by several significant figures. If in the spring it amounted to $100 billion, then by the beginning of November this amount had doubled. In general, the dynamics of capitalization growth amounted to more than 1100%.
The information was taken from CoinMarketCap - one of the most popular services that provides statistical data on virtual currency exchange rates. Turning to the resource, you can see that more than 50% of the entire electronic money market is accounted for by Bitcoin. Second and third places were shared by Ethereum and Bitcoin Cash, respectively.
The capitalization of cryptocurrencies depends on 2 main indicators: the exchange rate and the volume of money in circulation. For example, the issue of Bitcoin is constantly increasing, as the coin continues to be actively mined by miners. However, since the beginning of the platform’s existence, the complexity of the algorithms has been increasing every month, which also has a significant impact on the cost of its tokens.
Some electronic money is characterized by primary emission. In this case, the parameter is influenced by the market activity of the currency and its exchange rate, since the total volume is fixed and unchanged. An example is the Nextcoin resource.
Due to the fact that capitalization is directly proportional to the value of the coin, it also depends on demand indicators. The latter depends on a range of factors:
- Actions of influential players on cryptocurrency exchanges.
- Predictions of experts, various statements of popular analysts.
- Innovative technologies used in the blockchain industry.
- Adoption of electronic money at the legislative level and giving it official legal status.
- Other news information related to virtual coins.
Bitcoin's value has soared this year thanks to increased demand for the digital currency. The popularization of virtual money is associated with its legalization in Japan, the holding of numerous crowdsales, the introduction of the SegWit2x protocol, the constant launch of new forks and the participation of the project team at large-scale conferences.
If at any point the demand for virtual funds begins to decline, capitalization will also fall. Great importance for this parameter is the position of the governments of countries such as China and the USA. If they introduce a ban, the electronic currency will immediately go down. That is, both the price and capitalization indicators will drop sharply. It is worth recalling the situation that took place in 2013. In an extraordinary rally, Bitcoin's price soared to $1,000 before plummeting to $200 as large investors began buying up the coin, attracted by the prospect of quick profits.
This indicator was positively influenced primarily by players from China, who took an active part in the process of withdrawing capital from the state. Since there is a prohibition established at the legislative level, translation Money using conversion to dollars is not possible. But the amounts earned must be stored somewhere. Therefore, investors turned to the opportunities provided by Ethereum and Bitcoin.
The biggest difficulty in determining the value of virtual coins is that their real value cannot be calculated. There is simply no connection to any real objects or currencies. Another reason is the difficulty of identifying the number of lost tokens, since when recording devices fail and keys to electronic wallets are lost, access to digital money is closed forever. This is why the capitalization of cryptocurrencies becomes so complicated.
At the moment, the digital asset market continues to actively develop, which is why the volatility of many tokens is increasing. Different trading platforms enter different prices for the same coins. However, absolutely all market participants are interested in the successful future of the electronic space and invest real money to purchase or mine virtual coins. However, this does not exclude frequent sharp spikes and drops due to the influx of large volumes of investment funds. Perhaps in the future a certain regulatory mechanism will be used.
Any potential investor should first of all monitor this parameter of virtual money. The latter is also influenced by various events in the world related to blockchain and cryptocurrencies.
Some people mistakenly believe that value and capitalization are identical concepts. Of course, they are closely interrelated, but they belong absolutely different things. For example, the quotation of coins and their value have a direct relationship. However, if the former begins to grow, and a strong player appears on the market, numerous small speculators are sure to appear as well. If the profit of a large investor decreases or is fixed, a correction is made.
The continued devaluation of the yuan against the dollar will only increase the capitalization of virtual funds. At the same time, the process itself occurs with quite high speed. Over the past 3 months, the Chinese national currency has managed to strengthen its position, and this was reflected in the quotes of Dash, Monero and Zcash. It is these digital currencies that have been most impacted by the return of capital to the strengthening yuan. This event had virtually no impact on Bitcoin, since its rate is primarily determined by demand.
In 2017, the No. 1 cryptocurrency positioned itself as a reliable exchange asset with an upward trend. As its price increased, capitalization also increased, and this process will last at least another 9 months. If the governments of world powers decide to legalize electronic coins, this will have a positive impact on their value. However, the granting of legal status to tokens is unlikely to take place in the near future.
Having understood what capitalization is, the user inevitably faces the question of what is the benefit of knowing this information and how to apply it. As mentioned above, this parameter should not be confused with the cost of tokens. They are different in essence, although they have a certain relationship - a collapse in capitalization will provoke a fall in electronic money quotations, and their upward price jump will lead to its growth.
The mechanism is explained by the fact that the value of a digital currency is largely based on people’s trust. Watching how it breaks the next high, investors conclude that demand has begun to exceed supply. Some players invest colossal amounts, and, therefore, the asset has potential and its price will rise in the future. To get the greatest benefit, you need to invest in one or another project immediately after the start. After all, as soon as the digital currency attracts the interest of truly large players, they immediately pump it up. In addition to them, a whole variety of various exchange bots and small speculators take part in the process, who accelerate the artificial price jump to unprecedented proportions. This will continue until any negative news appears or large investors themselves decide to stop inflating the speculative bubble. Then, as a rule, a correction follows, and in some cases even a trend change.
Other significant differences between electronic coins and classic exchange assets include the inability to correctly establish real capitalization indicators, since it will not be possible to accurately determine the amount of funds available to investors. After all, a huge number of tokens have disappeared as a result of hacker attacks, are stored in forgotten wallets or were sent to non-existent addresses (it is impossible to restore a personal key, as well as cancel a transaction). In addition, any hardware malfunction can cause the loss of digital coins if they were placed in a hardware wallet that was installed on the computer.
Despite the fact that the maximum and current number of coins of certain types of virtual money is known exactly, it is almost impossible to figure out how many of them are in real circulation. According to experts, up to 4 million Bitcoin tokens alone were lost forever, which makes it impossible to accurately calculate the level of capitalization.
However, this parameter is still very indicative and demonstrates the general degree of popularity of the platform. That is why, before starting trading on the stock exchange, it would be useful to analyze the movement charts of this characteristic.
Capitalization of cryptocurrencies is rightfully considered one of the the most important indicators in the business of trading. It reflects the total value of all tokens that are in circulation, and also demonstrates the degree of popularity of the site.
When choosing a digital currency for investment, you should also rely on this characteristic. A coin with a significant capitalization is quite resistant to minor movements. An instant price jump is unusual for such a currency. But platforms with small capitalization, on the contrary, have an unstable exchange rate and can change it every minute. Thus, decentralized platform No. 1 Bitcoin increased its value 10 times in 1 year. Ethereum achieved similar results in just 6 days.
Anyone considering investing in cryptocurrency should take these nuances into account. In addition, you should not ignore daily changes in capitalization - such fluctuations are a kind of market signals.
The first digital currency Bitcoin is the undisputed leader of the cryptocurrency world. Considering the indicators of the dominance index, it is difficult to imagine that any of the altcoins will be able to dislodge it from the throne. According to the latest data, Bitcoin's capitalization today accounts for almost 55% of the total value of the global digital currency market and this is far from a record figure. In some periods, the dominance index exceeded the 70% mark; rarely did it fall below the 45% line, quickly restoring its previous positions.
What is Bitcoin capitalization?
When starting to discuss the realities that caused such a significant increase in the value and market performance of Bitcoin and cryptocurrencies in general, it is worth understanding the definition of the term “capitalization”. There are some similarities between decentralized digital assets and their centrally issued and regulated fiduciary counterparts. Note that despite the fundamental differences, in both cases classical economic terminology is used to designate the features of the functioning of such opposite financial phenomena. Among these is the term market capitalization, which is used to denote the total value of any of the assets put into circulation.
According to generally accepted standards, the function of assets in classical markets is performed by securities. They are issued by public companies and listed on stock exchanges. In the case of digital currencies, slightly different rules of the game apply. The capitalization of cryptocurrencies, and with them Bitcoin, reflects the total value of all virtual coins issued at the time of settlement, in contrast to the stock market, where the starting point is only turnover indicators valuable papers. To determine this parameter, the US dollar is used, which still plays the role of the main reserve currency of global significance. It is worth noting that Bitcoin, perceived by most people as good option not only storing, but also increasing savings, will most likely remove its main fiduciary opponent from the throne in the foreseeable future.
Considering the comparative youth of the digital class monetary units, you can often notice one feature - the lack of clear standards in defining the term Bitcoin market capitalization and similar indicators of the global cryptocurrency market. Meanwhile, a sharp line should be drawn, because Bitcoin, being a recognized leader, is significantly superior to the rest of its “colleagues” taken together, many of which are just forks developed on the open source code of the progenitor.
Capitalization of Bitcoin and the digital currency market
Ordinary people are rarely interested in the technical side of the digital currency phenomenon. What is important to them is the fact that the value of the first cryptocurrency and other virtual coins has undergone incredible upward adjustments. As a result, in 2017 the capitalization rate of Bitcoin increased significantly and at the time of writing (December 16, 2017) it is slightly more than $296 billion. The entire cryptocurrency market is estimated at $543 billion.
The importance of the capitalization phenomenon is to be found in the fact that it determines the attractiveness of Bitcoin and various altcoins from the point of view of investing money. There is a natural connection between the value of quotes and indicators of exchange rate changes (volatility). That is, with an increase in the value of the total mass of virtual coins, a specific crypto asset becomes a more reputable market player and is less susceptible to speculative schemes provoked by trend traders.
Difficulties associated with determining Bitcoin capitalization
Bitcoin's capitalization this year has exceeded the most optimistic forecasts and continues to grow. It can be calculated quite easily, using as a basis a simple algorithm that involves multiplying the total number of units issued by current market quotes. This is what the administration of popular analytical web resources, for example, coinmarketcap.com, does. Therefore, these data can hardly be called accurate.
How can we explain the significant discrepancy between the online version and the real Bitcoin capitalization indicators recognized by the academic circles of the crypto community?
The following factors need to be considered:
- At the time of writing, the number of coins generated was close to 17 million.
- Approximately 4.2 million more Bitcoin units will be “issued”.
- The emission rate decreases by 2 times every 4 years. After the next halving, which happened in the summer of 2016, it amounts to 1,800 virtual coins (coins) per day, and in 2020 it will stop at around 900 conventional units.
- The number of coins (lost, destroyed) that cannot be restored, which are not taken into account when determining the rate and capitalization of Bitcoin by analytical web resources, is very high. Some indicate a figure of 1 million (the number of coins that went to the creator of the phenomenon, Satoshi Nakamoto), but according to experts, the number could be 2.5–4 times higher.
For your information, halving is a twofold reduction in the number of prize coins issued by the system not only of Bitcoin, but also of most alternative monetary units to miners for discovering a new block in the blockchain system.
In the case of Bitcoin, the duration of each cycle is 4 years. Since the founding of the Bitcoin payment network and cryptocurrency, the number of premium coins was 50 coins; in 2012 it decreased to 25 conventional units, and in the summer of 2016 it amounted to 12.5 Bitcoin. After the next halving, which will take place in 2020, the number of prize coins will be 6.25 Bitcoins.
Dependence of Bitcoin capitalization on various factors
Despite the presence of innovative mechanisms, Bitcoin is a relatively young financial phenomenon, just entering the stage of global recognition and maturity. Although different altcoins inherited certain features from the pioneer, the first cryptoasset itself received a lot as an inheritance from its fiduciary counterparts. For example, volatility, which has important to determine real Bitcoin capitalization indicators. Contrary to popular misconceptions, volatility should not be considered a purely cryptocurrency phenomenon. It came to the ecosystem of digital assets from fiat, although it has a much wider scope, taking into account the difference that exists between the cost of Bitcoin digital coins and the quotes of paper banknotes of national currencies.
Second important element is the number of issued coins, the number of which is constantly increasing. Unlike exchange rate fluctuations, emission carried out only through mining is a static indicator. Although here there are several factors that are taken into account in the algorithm, compiled in advance by the developer Satoshi Nakamoto. In particular, as the number of virtual coins to be generated decreases, the difficulty of mining increases. Against the backdrop of what is happening, Bitcoin is becoming a scarce asset, less and less susceptible to depreciation.
An increase in the rate is reflected in the growth of Bitcoin capitalization. Although we should not neglect the role played by the classical parameter, which implies the importance of the relationship between supply and demand in the market. As is the case with other young assets, the popularity of Bitcoin among investors and its market value indicators are still significantly dependent on several factors. Among them are:
- Periodic interventions carried out by major players in the crypto trading market.
- Introduction of technical innovations and algorithms in the field of digital currency.
- Forecasts and statements by luminaries of economic thought.
- Attitude of officialdom, amendments to current legislative standards and regulatory standards.
Why did Bitcoin's capitalization increase in 2017?
Bitcoin capitalization growth chart from 2013 to 2017
Current fiscal year turned out to be a record for both Bitcoin and the vast majority of altcoins.
The sharp increase in Bitcoin capitalization today has several justified reasons:
- Increased demand in general for alternative currencies.
- The rise of the ICO phenomenon. This is the initial offering of tokens from various startups, issued in a fixed quantity, which are sold both for cryptocurrencies (Bitcoin, Ethereum and others) and for fiat funds. Often, successful ICO campaigns provoke the emergence of new varieties of digital currencies.
- Entering the official level in some states. Especially in Japan and other Asian countries.
- The emergence of several forks (Bitcoin Cash, Bitcoin Gold), which proved their worth against the background of pessimistic forecasts of experts.
- Integration of the new Lighting Network protocol and the likely activation of the Segregated Witness2X release, which are designed to solve the problems of scaling the system of the first cryptocurrency.
- Comparative stabilization of exchange rate changes.
- Growing adoption of Bitcoin by representatives of the retail sector (trade).