This is a guide on how to calculate cryptocurrency value. When people say “cryptocurrencies” they are referring to digital currencies that are created using cryptography. Cryptography is a process of encoding data so only the intended recipients can read it. Cryptocurrency uses this technology in the creation, transfer, and validation of transactions.
Unlike fiat currencies (ex: USD, EUR) which are created and backed by central authorities (government banks), cryptocurrency is decentralized because all transactions are confirmed by multiple participants called miners. Miners use computers to solve complicated mathematical problems and each time they solve one they earn or create units of cryptocurrency.
Calculating the Market Cap of a Cryptocurrency
Market capitalization is the total value of a given cryptocurrency. And it’s calculated by multiplying the current price by its supply in the cryptocurrency markets. The market cap of a cryptocurrency tells you how much money is in circulation in its economy.
Heres an example to calculate the market cap of a particular cryptocurrency. If an individual Bitcoin trades for $2,500, and there are 16 million Bitcoins currently in circulation (16,000×1 million), then this particular cryptocurrency has a market cap of $40 billion (16 million x $2,500 =$40 billion).
Calculating the Price of a Cryptocurrency
Cryptocurrency prices are calculated by the following.
Price = Market Cap / Circulating Supply
The market cap of a cryptocurrency is the circulating supply times its fiat price, meaning that to calculate the price of a cryptocurrency, you have to first understand what the market capitalization is.
You can calculate the market cap of a coin by multiplying its circulating supply with that coin’s fiat price on an exchange. Since not every coin will have multiple exchanges it is listed on, and most coins are not linked with every fiat currency, you may find yourself needing to consider different exchanges. Or you could consider different trading pairs in calculating the value of a crypto asset. A trading pair being which two currencies are being traded against each other.
Calculating the Supply of a Cryptocurrency
The total supply of a cryptocurrency does not affect its value, nor does the total amount of money transferred. The only metric that truly matters is the circulating supply is the number of coins available to be bought and sold by investors.
So how do you determine the circulating supply? A simple formula can help.
Circulating supply = total supply – locked up supply
Locked-up coins are those held in long-term staking or savings wallets, held by team members who don’t wish to sell their crypto holdings for personal or business reasons, or are waiting to be released at a future date. In many cases, these coins are subject to vesting schedules similar to those issued by companies to founders and employees.
Calculating the Volume of a Cryptocurrency
As we’ve already discussed, there are various ways to calculate the value of a cryptocurrency. However, it’s important to understand the importance of the volume of a cryptocurrency as well.
The volume of a cryptocurrency is essentially how much has been traded in a certain period. It’s important for calculating market liquidity levels and general trading activity. For example, if you’re looking at the 24-hour price chart for Bitcoin on Coin Market Cap, you’ll also see information about the 24-hour trading volume for Bitcoin.
This is helpful because you can then compare this number to other cryptocurrencies and make an informed decision about which ones are worth investing in and trading in terms of their current activity levels.
It Is More Than Simple Supply and Demand
Several variables affect the value of a cryptocurrency. One of the most important is the price of electricity and computer hardware needed to mine it. If a currency is computationally intense, it might require expensive computer equipment that not all miners can afford. This can give bigger players like governments an upper hand in controlling the market.
Another key variable is whether or not a currency places limits on how much of it can be created. If not, inflation could devalue it to near worthlessness over time, rendering it useless as a medium or store of value. Although, it does have other valuable properties like decentralization, which may still make it useful for some people.
Tying up the Various Factors
The above factors are just two examples out of many variables that contribute to cryptocurrency price fluctuations. Values are dependent on so many different things that there’s no reliable way to predict them even with sophisticated algorithms and data analysis methods.
Now you know the difference between value, price, and volume. You also understand that market capitalization is simply a function of price and supply. And no longer are you baffled by the concept of coin “supply” in general. You know that it refers to the number of coins made available for public trading.
Finally, let’s recap the two most basic ways to determine cryptocurrency value.
The supply-and-demand model, and the market cap. Supply-and-demand theory states that if demand increases relative to supply, then a currency will become more valuable, but remember that more people can enter or leave a market at any time.
Market cap (price times circulating supply) is an estimate of how much money has been used to purchase a particular coin. It’s affected by both price (value) and supply (amount), so it doesn’t give us much insight into whether or not something is undervalued or overvalued at any given point in time compared to its fundamentals.
