The so-called market capitalization of a cryptocurrency is a purely theoretical piece of data.
From a strictly technical point of view, it is nothing more than the product of the price of individual units (the tokens) for the total number of units in circulation.
The total number of tokens in circulation is called circulating supply and corresponds to the number of tokens created and issued, i.e. net of any tokens already created but not yet usable.
For example, at this moment there are just under 18.5 million bitcoins in circulation, which correspond to BTC’s circulating supply. As far as Bitcoin is concerned all the BTC created are usable as soon as they are created, therefore the circulating supply corresponds to the total supply.
However, it is already known that a maximum of 21 million will be created, therefore the max supply is indeed 21 million.
Since the price of a single BTC is currently around $9,100, the market capitalization of bitcoin is about 170 billion dollars and is obtained by multiplying the circulating supply of about 18.5 million BTC by the price of 9,100 $/BTC.
The calculation is slightly more complex for those cryptocurrencies for which all tokens have already been issued, but a part is not yet usable.
For example, all of the approximately 100 billion XRP tokens have already been issued, but only about 44 billion have been released.
Therefore, multiplying the circulating supply of Ripple, i.e. 44 billion XRP, by the price of about $0.19/XRP of a single token gives a market capitalization of just over $8.5 billion.
What is the purpose of calculating the market capitalization
First, it must be said that the calculation is purely theoretical, because in the hypothetical case that someone would decide to sell all the BTC, or the XRP, in exchange for US dollars, it is practically impossible that they would get an amount in dollars equal to the market capitalization of Bitcoin or Ripple.
After all, putting huge quantities of tokens on sale would make their price fall, and no one is able to determine how much the price could fall.
Nevertheless, although it is purely theoretical, it is useful to make comparisons, especially between different cryptocurrencies.
In the end, even the market capitalization of listed companies is calculated in the same way and has the same limits, but at least it allows for comparisons.
For example, the market capitalization of Ethereum is about 26 billion dollars, so we can say that the existing BTC in circulation as a whole are worth about 6 and a half times the circulating ETH.
In turn, the total supply of ETH is worth about 3 times that of XRP, and that of XRP is worth more than twice as much as that of BCH.
Since the market capitalization of Bitcoin Cash is just over $4.1 billion, we can say that Bitcoin as a whole is worth more than 41 times Bitcoin Cash.
The only real use of this theoretical data of the so-called market capitalization is to make comparisons, not only between different cryptocurrencies but also between a cryptocurrency and for example a share.
For instance, Tesla‘s market capitalization is about 279 billion dollars, which is a little more than the 270 billion dollars capitalization of all the cryptocurrencies put together.
Another type of comparison can be made between changes over time in the market capitalization of a single cryptocurrency, or even better, the total market capitalization of all cryptocurrencies.
For example, in 2015, when Ethereum was created, the total market capitalization of the entire crypto market was about $4 billion, then rose to $10 billion in 2016, and then soared to over $800 billion during the speculative bubble at the end of 2017.
By the end of 2018, it had returned to about 100 billion, while by mid-2019 it had risen to over 350 billion.
Since then it first fell below 200 billion at the end of 2019, then rose to over 300 billion in February 2020, collapsed to 140 billion in mid-March, and then rose to about 270 billion today.