About Market Capitalization and Crypto Risks
The difference between a high cap and low cap in crypto is like the difference between Apple and a penny stock in stocks. That is, one is much riskier than the other.
What is Market Capitalization in Crypto? Market Capitalization in crypto is the number of tokens times the price of a token (token total x price of a token). Usually, we look at circulating “cap” (total number of tokens in circulation today) and total cap (total number of tokens that can be created). The Fully Diluted Value (FDV) of a coin is the total market capitalization based on all coins that can ever be created. When we say low cap, mid cap, and high cap, it is a reference to circulating cap size relative to other cryptos (for example as ranked by CoinMarketCap.com).
Low Cap, Mid Cap, and High Cap Risks
The main risks of low caps (and even many mid-caps) include lack of exchanges they are traded on, liquidity, and the general risk of them going out of rotation.
Low caps, let’s say anything not in the top 50 by circulating market cap, come and go like the wind. These projects rarely stay around, they often can’t launch products, and most die a slow death on exchanges as founders and early investors dump them to zero drying up any liquidity that is there.
Outside of massive bull runs, low caps are for gambling and moonshots.
Mid caps, let’s say the top 10 – 50 by market cap, are a mix of great ways to lose money and coins that have the potential to stick around and grow over time. In some cases, a mid cap can be a good investment, but you really have to do your research. Many mid caps have come and gone over the years.
A large cap, lets say a coin in the top 10 by market cap or so, is most likely going to be a mainstay project that has proved itself over time. It usually has the liquidity needed for some modest size players to be involved. You can make a market order, and you probably won’t get slippage. It is rare, but not impossible, to lose everything on a large cap.
Then you have Bitcoin. Bitcoin is the crown jewel of large caps. It is the safest bet of all of crypto outside of maybe stable coins… but even Bitcoin is risky.
So, if you are in the depths of a bear market and you want to take a moonshot on holding a low cap, or if you are a day trader and you want to ride a low cap for a minute, then ok, take that risk. But for the average investor, even mid caps are risky. For those who want exposure to crypto with as limited risk as they can get, you should focus on large caps and especially on Bitcoin.
Someone who is heavy in Bitcoin and then a bit in ETH, XRP, and so on will likely do well over time if crypto does well. Someone who is heavy and low and mid caps may do very well, or they may literally watch their investments dwindle to zero even if we get another epic bull run in the future.
In simple terms, the rotation of low caps and the rate at which they come and go makes them a poor investment in general, and a big trap for newcomers (despite small windows of time in which they outperform many large caps).
TIP: The longer a coin holds a position, the more likely it is to retain it as a rule of thumb. A new coin jumping up to a top spot based on initial FOMO does not a large cap make for example.