Why Investors Are Deceived by Market Capitalization

When you look at the ranking of a cryptocurrency, you are probably checking the market capitalization as the main indicator of the project's importance. But here’s a fact that might shock you: market capitalization does not mean how much money is actually in the market. This is the most widespread mistake among new investors.

How Market Capitalization is Calculated

The term market capitalization in the blockchain industry refers to a measure of the relative size of a cryptocurrency. The formula is simple: Current Price × Total Supply in Circulation = Market Capitalization.

Take a practical example. If a coin is trading at 10 USD and there are 50 million units in circulation, the market capitalization reaches 500 million USD. It seems clear, doesn't it? The problem arises when investors interpret this as the actual amount of capital invested.

The Gap Between Price and Liquidity

Here is what is not visible at first glance: a relatively modest increase in price can cause an explosion in market capitalization, without proportional money entering the market with this increase.

Let's return to the previous example. If only a few million dollars enter the market and raise the price from $10 to $15, the market capitalization inflates from $500 million to $750 million. It seems that $250 million has entered, but the reality is completely different. The amount needed to produce this price increase directly depends on volume and liquidity - two factors that play a crucial role in market dynamics.

Volume and Liquidity: The Key to Market Manipulation

Volume simply represents the number of assets traded over a certain period. Liquidity, on the other hand, describes how easily you can buy or sell an asset quickly without drastically affecting the price.

When a market has high volume and liquidity, the order book is filled with orders at different price levels. This means there is a lot of money there, but also many players. A “whale” would need an enormous amount to significantly move the price. Volatility decreases and the market becomes more stable.

On the contrary, a market with low volume and a thin order book? This is easy to manipulate. Relatively little money can cause drastic fluctuations, both in price and market capitalization. Here, the risk is much greater.

The Final Lesson

Market capitalization provides a glimpse into the relative size of a crypto project, but it is not a perfect indicator. To make informed decisions, you should also look at volume, liquidity, and the broader market context. Don't be fooled by large numbers — behind them can lie much more complex realities.