Understand crypto financial metrics

and be a better investor

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Understanding Key Financial Metrics for Cryptocurrency Investment

In this guide, we explore five essential financial metrics that investors and traders utilize when evaluating cryptocurrencies, including market capitalization, supply, and volume. By understanding these metrics, we can make informed decisions regarding potential investments.

Many investors and traders use these metrics to achieve several goals:

  • Identify projects with high growth potential

  • Recognize projects exhibiting strong network effects

  • Mitigate biases that can influence decision-making

The calculations for these financial metrics are readily available on our coin pages, enabling us to analyze them easily.

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Key Financial Metrics Overview

1. Market Capitalization

Market capitalization, or "market cap," represents the total value of a cryptocurrency project. It is calculated by multiplying the current price of the coin by its circulating supply. Essentially, market cap indicates the total cost to acquire all coins available in circulation.

Formula:

  • Market cap = Current price × Current circulating supply

Current Market Cap Examples (as of July 30, 2021):

  • Bitcoin: $1,014 billion

  • Ethereum: $366.9 billion

  • Algorand: $3.6 billion

Market cap serves as a popular metric among traders as it reveals the total investment in a cryptocurrency and allows comparisons with other projects. Generally, a larger market cap signifies greater stability, while smaller market caps may indicate potential for growth.

Important Considerations:

  • Always assess the volume alongside market cap for a more accurate picture. For instance, a market cap that appears inflated can mislead if supported by low transaction volume.

2. Volume (24hr)

Volume (24hr) represents the total dollar value of transactions completed over the past 24 hours. This metric is crucial for assessing liquidity, which reflects how easily a cryptocurrency can be bought or sold.

  • High volume indicates a healthy market with active buying and selling.

  • Low volume may hinder large purchases without significantly impacting price.

Current Volume Examples (as of July 30, 2021):

  • Bitcoin: $21.2 billion

  • Ethereum: $12.5 billion

  • Polkadot: $525 million

3. Supply

Supply indicates the number of coins currently in circulation. It is essential to note that this figure is not exact; some tokens may be held by long-term investors, burned, or lost. For example, Bitcoin’s current supply stands at approximately 18.8 million, with an estimated 3.7 million permanently removed from circulation.

Checking supply can help prevent falling into "unit price bias," where investors purchase coins simply because they have low prices. This often leads to irrational buying behavior.

Current Supply Examples (as of July 30, 2021):

  • Bitcoin: 18.8 million

  • Ethereum: 116.9 million

  • Cardano: 32.1 billion

4. Max Supply

Max supply refers to the total number of coins that will ever be created for a particular cryptocurrency. For Bitcoin, the max supply is capped at 21 million, of which 18.8 million are currently in circulation.

Not every cryptocurrency has a max supply; in such cases, it’s important to consider inflation, which reflects the rate at which new coins are introduced. For instance, Ethereum currently experiences inflation, but upcoming changes may transition it to a deflationary model.

Current Max Supply Examples (as of July 30, 2021):

  • Bitcoin: 21 million

  • Cardano: 45 billion

  • Solana: 272.6 million

5. Price

The price of a cryptocurrency is a critical metric for both investors and traders. While long-term investors focus on holding their assets, traders aim to capitalize on short-term price fluctuations.

Recent price action provides insight into market trends, helping traders determine whether to buy or sell. We offer price charts that reflect movements over various periods, including the past week, month, and quarter, along with recent highs and lows.

Resources

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Nothing in this newsletter is financial advice. Always do your own research and think for yourself.