Cryptocurrencies, like other financial assets, are subject to the rules of market finance. Thus, one of the most commonly used metrics (sometimes incorrectly) is Market Cap. Some investors prefer to invest in cryptocurrencies with large market caps, such as Bitcoin or Ethereum. Others, conversely, prefer to focus on cryptocurrencies with low market caps.
Why? Well, the probability of a higher return on investment is also greater. However, it's also said that cryptocurrencies with a lower market capitalization carry higher risks…
Although small-cap cryptos are considered riskier investments, some Wall Street wolves argue that these stocks offer excellent growth potential and high returns on equity to justify their inclusion in the holdings of all but the most conservative investors.
Let's now see everything you need to know about investing in low cap cryptocurrencies.
What is the concept of “market capitalization”?
Before knowing what the market capitalization of a cryptocurrency is, it is important to define, first of all, the market capitalization itself.
In simple terms, market capitalization is equivalent to the market value of a listed company. A listed company is a business that opens up a portion of its capital to outside investors. It is then said to become " public ." This is the principle of an IPO (or Initial Public Offering).
Introducing a company to the stock market is, in fact, a very long and complex financial operation. It aims to sell, on a stock market, all the shares of a company or part of them to several investors. Before a company goes public, it must submit its IPO plan to the Financial Markets Authority (AMF), a body which has the power to judge the quality of the file. Once the file submitted is deemed compliant, the financial markets authority issues a visa which allows the IPO prospectus to be published.
Thus the market capitalization of a listed company corresponds to the value, at the market price, of all the securities it owns. To calculate the market capitalization of a company, you must therefore multiply the number of its shares in circulation by the share price.
Example: For a company with 500,000 outstanding shares , each trading at €15 at a given time, the company's market capitalization is €7.5 billion (500,000 x €15) at that time. In theory, this €7.5 billion represents the amount a potential investor would have to pay to acquire 100% of the company's capital. Having understood what market capitalization is, let's now turn our attention to cryptocurrencies.
What about the market capitalization of a crypto?
In decentralized finance , a cryptocurrency's market capitalization is the value of all its tokens at a given moment. This value is calculated by multiplying the number of tokens in circulation at that time by the price of one token at the same time. It goes without saying that cryptocurrency market capitalization fluctuates instantaneously due to the high volatility of these assets. Within the ecosystem, you'll also hear about the " total cap of a cryptocurrency " (referring to the total number of tokens that can be created). You'll also hear about the fully diluted value (FDV) of a coin, which is its total market capitalization. That is, the value of all the tokens of a cryptocurrency that can be created.
—>Read the article: Should we consider FDV (Fully Diluted Valuation)?
In the crypto world, we talk about cryptocurrencies with small, mid, and large market capitalizations, in comparison to the size of other cryptocurrencies. CoinMarketCap.com remains the definitive website that serves as our reference.
The risk of investing in low cap cryptos
In December 2017, the cryptocurrency star reached its first all-time high. On December 17, 2017, Bitcoin was trading at over $19,891 per unit. This was the first record high for Satoshi Nakamoto 's invention . Amid this surge, the crypto sphere not only witnessed accelerated adoption of crypto assets but also the emergence of numerous new crypto projects.
Among these projects, many have remained in the market and are performing well. On the other hand, hundreds of thousands of others have simply disappeared.
The term " deadcoin " is often used to refer to cryptocurrencies that reached their peak before disappearing. Some even made it into the top 10 most promising projects before completely falling from grace. Very often, these are simply shitcoins , meaning worthless cryptocurrencies with no value other than speculation.
According to the website deadcoins.com , there are currently more than 1,719 crypto projects that have shut down in the crypto world. This calls for caution before investing.
The probability of falling cryptos condemned to disappear
Early on, towards the end of 2019, Brad Garlinghouse , CEO of Ripple (XRP), was already stating that 99% of cryptocurrencies were doomed to disappear. " The world doesn't need more than 3,000 cryptocurrencies," he declared. Whether he was right or not, only time will tell. Among the reasons for the failure of many crypto projects are insufficient trading volume and developers abandoning projects due to financial setbacks. Not to mention the fact that many projects have turned out to be nothing more than scams. Overall, low-cap crypto projects are the riskiest. They haven't yet proven themselves and are more likely to fail in the long run.
The main risks associated with small-cap cryptocurrencies include the limited number of exchanges on which they are traded and a lack of liquidity. These cryptocurrencies are generally those that are not in the top 50 by market capitalization . These projects rarely last long, they often cannot launch products, and most slowly die on the exchanges because founders and early investors frequently sell them off completely, thus draining all available liquidity.
These types of cryptos are, in general, traps for new entrants into the ecosystem.
For beginners, we suggest you read our article on: How to invest in cryptocurrencies? (The Ultimate Beginner's Guide)
Attention!!! The fact that a crypto is ranked in the top 50 or even in the top 10 does not make it a promising project. Some coins entered the top 10 large-cap cryptos before collapsing or disappearing altogether. This was for example the case for:
PayCoin (XPY)
In January 2014, PayCoin (XPY) was the fourth-largest cryptocurrency by market capitalization, with a valuation of $39.4 million and a price of $3.20. This was quite an incredible success for a coin that was essentially a complete scam. It's worth remembering that the cryptocurrency launched with the largest number of pre-mined coins in history: 12 million out of a possible 12.5 million in circulation at launch.
PayCoin generated enough money to attract the attention of the IRS (Internal Revenue Service, the US tax authority) and the SEC (Securities and Exchange Commission, the US stock market regulator). Ultimately, PayCoin's CEO pleaded guilty to fraud. However, despite the cryptocurrency's collapse, PayCoin remains listed in the cryptocurrency rankings. It currently holds the 2396th position with a price of €0.00130 (slightly less than that in US dollars).
MegaCoin (MEC)
In January 2014, MegaCoin ranked 10th among cryptocurrencies with a market capitalization of $18.1 million. Nearly 18 million coins were in circulation at the time, with a price slightly above $0.80 ($0.83 to be exact). Simply put, MegaCoin is a clone of Litecoin , the famous Bitcoin without flaws. MegaCoin was pre-mined by its developer the week before its launch. Even before investors had the chance to buy or mine the coin, nearly 6 million coins had already been accumulated by a small group of people.
Today, MegaCoin isn't even listed anymore. CoinMarketCap presents the project as " Unlisted ."
AuroraCoin (AUR)
AuroraCoin, for its part, aimed to become the national cryptocurrency for Iceland, which was gradually recovering from the banking collapse that had occurred in the country some time earlier. However, the project failed due to difficulties encountered in exchanging the coin for fiat currencies.
Conclusion on investing in “Low Cap” crypto
Cryptocurrencies are a risky sector, just like the entire financial market. (Life itself is risky, after all). This article is simply meant to remind you how crucial it is to thoroughly research a project before investing. If you act recklessly, it's like placing random sports bets , and you'll lose money. Always conduct a thorough fundamental analysis before investing. While it's generally believed that low-cap cryptocurrencies are the riskiest, they can also be fantastic investment opportunities that could allow you to win big…
After a thorough study of a crypto project, do not hesitate to invest when you consider that it has high potential. Be careful though. The only advice to give each other is to invest the amount that you are prepared to lose. Because, even bitcoin (BTC), the first crypto in terms of market capitalization, considered the safest investment of all cryptos (apart from perhaps stable coins) is also risky. And, even, do not forget that bitcoin was also a "low cap" crypto before reaching the first place...
—–
This is not investment advice. Always do your own research. Only invest amounts you are willing to lose.
To buy cryptocurrencies (in a simple way) :
- Speaking on Binance (Complete crypto trading platform)
Generate interest on your cryptocurrencies:
- Speaking on Youhodler (Earn up to 8% interest)
To secure your cryptocurrencies:
To have fun and play
- The best for Esport and sports betting: CloudBet
Learn more about ZoneBitcoin
Subscribe to get the latest posts sent to your email.
