Guellord MbusaCryptocurrencies, like the rest of financial assets, obey the rules of market finance. Thus, one of the most used (sometimes wrongly) metrics is that of Market Cap (market capitalization). Some investors prefer to invest in cryptos with large market caps like Bitcoin or Ethereum. Others, conversely, will prefer to focus on cryptos with low market capitalization (low cap in English).
For what? Well, the probability of making a greater return on investment is also greater. However, it is also said that cryptos with low market capitalization cover the highest risks…
Although small-cap cryptos are considered riskier investments, some cryptocurrencies Wall Street argue that these stocks offer excellent growth potential and a high return 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 being a company, which opens part of its capital to external investors. We then say that it becomes “ public insurance ". This is the principle ofIPO (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 that owns 500 thousand shares in circulation and each of them is exchanged at 15 Euros at a time t, the market capitalization of the company is € 7,500 million (500 x €000) at this time t. In theory, the 15 million euros represent the sum that a potential investor would have to pay to acquire 7% of the company's capital. Having understood what market capitalization is, let us now be on the side of cryptocurrencies.
What about the market capitalization of a crypto?
In the finance decentralization, the market capitalization of a cryptocurrency is the value of all the tokens of this crypto at a time t. This value is found by multiplying the number of tokens in circulation at that moment by the price of a token at the same moment. We might as well tell you that the capitalization of cryptos fluctuates instantly due to the high volatility of these assets. In the ecosystem you will also hear about “ total cap of a crypto », (it designates the total number of tokens that can be created). But also of the fully diluted value (FDV) of a coin which is its total market capitalization. That is to say the value of all the tokens of a cryptocurrency that can be created.
—>Read the article: Should we consider the FDV (Fully Diluted Valuation)?
In the crypto sphere, we are talking about a small cap, mid cap and large cap cryptocurrency, in comparison to the size of other cryptos. I coinmarketcap.co remains today the only site par excellence which serves as a reference for us.
The risk of investing in low cap cryptos
December 2017, the cryptocurrency star reached its first historic record. On December 17, 2017, bitcoin was trading at more than $19 per unit. This was the first historical record of the invention of Satoshi Nakamoto. In this excitement, the crypto sphere has not only witnessed an accelerated adoption of cryptographic assets but also the arrival of numerous 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 peaked before disappearing. Some even made it into the top 10 of promising projects before completely falling out of favor. Very often, moreover, it is simply a question of shitcoin, that is to say bogus cryptocurrencies without any interest other than speculation.
According to the website deadcoins.com, there are currently more than 1 crypto projects that have said goodbye to the cryptosphere. Which calls for caution before investing.
The probability of falling cryptos condemned to disappear
Very early, towards the end of 2019, Brad GarlinghouseCEO Ripple (XRP), already stated that 99% of cryptos would be condemned to disappear. The world doesn't need more than 3 cryptocurrencies he declares. As to whether he was right or not, only time will tell. Among the reasons that cause the bankruptcy of many crypto projects, we cite the lack of trading volume, the abandonment of projects by their developers due to financial failures. Not to mention the fact that many projects turned out to be nothing more than simple scams. Overall, low-cap crypto projects happen to be the riskiest. They have not yet proven themselves and are likely to fail in the long term…
The main risks of small cap cryptos include the lack of exchange platforms on which they are traded and the lack of liquidity. These cryptocurrencies are generally those that are not in the top 50 in terms of market capitalization. These projects rarely stay in place, they often cannot launch products and most slowly die on the stock exchanges, because very often the founders and early investors empty them to zero, thus drying up any liquidity present.
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)
The play PayCoin (XPY) was, in January 2014, ranked 4th among the most capitalized cryptocurrencies with a valuation of $39.4 million and a price of $3.20. This was a pretty incredible achievement for a coin that was nothing more than a complete fraud. We can thus remember that the crypto was launched with the largest number of pre-mined coins in history: 12 million out of the possible 12.5 million in circulation at the time of its launch.
PayCoin has generated enough money to attract the attention of theIRS (Internal Revenue Service which is none other than the American tax authorities) and the SEC (Securities and Exchange Commission which is the policeman of the American Stock Exchange). In the end, the CEO of PayCoin pleaded guilty to fraud. However, although the crypto has collapsed, PayCoin remains listed in the cryptocurrency rankings. Today with a 2396th place for a price of 0.00130 euros (A little less than that in US dollars).
MegaCoin (MEC)
In January 2014, MegaCoin occupied 10th place in the top cryptocurrencies with a valuation of $18.1 million. Nearly 18 million coins were then in circulation with a price slightly exceeding 0.80 dollars ($0.83 exactly). To put it simply, MegaCoin is a clone of Litecoin, the famous Bitcoin without flaws. MegaCoin was pre-mined by its developer the week before its launch. Before investors even had the chance to purchase or mine the coin, nearly 6 million coins had already been accumulated by a small group of a few people.
Today MegaCoin is no longer even listed. The CoinMarketcap presents the project in the form of “ Ranking not listed »
AuroraCoin (AUR)
AuroraCoin for its part, was intended to become the national cryptocurrency for Iceland which was gradually recovering from the banking collapse occurred in the country some time previously. However, the project was a failure due to the difficulties encountered in exchanging this coin for fiat currencies.
Conclusion on investing in “Low Cap” crypto
Cryptocurrencies are a risky sector like the entire financial market. (Life itself is risky, eh). This article is only intended to remind you how crucial it is to study a project carefully before investing in it. If you do anything, it amounts to doing sports bet randomly and you will lose money. Always make a fundamental analysis push before investing. Although the general belief is that low cap cryptos are the riskiest, they can also prove to be great investment opportunities that can allow you to win the day...
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...
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This is not investment advice. Always do your own research. Only invest amounts you are willing to lose.
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