When we multiply the number of cryptocurrency tokens in circulation with the single token's current price, we gain the cryptocurrency's valuation.
Market capitalization signifies a cryptocurrency's valuation because it tells us how stable its price is likely to be. Tokens with low market caps are notoriously volatile because even smaller crypto whales can drastically shift their price moves. Therefore, small market cap crypto coins are often subject to pump-and-dump schemes.
In contrast, Bitcoin, with its over $1 trillion market cap, is quite difficult to manipulate, and the whales have to be much larger to affect its price moves, either up or down when they erect buy or sell walls. Correspondingly, small market cap coins represent a riskier investment because they are more likely to succumb to the irrational whims of the market.
Case in point, how to calculate market cap is quite simple. If we were to release a cryptocurrency with 800,000 coins in circulation, each priced at $5, its market cap would be $4 million. However, if we wanted to calculate a fully diluted cap, that just means we would have to include those tokens that are not yet minted, i.e., released in circulation.
In the case of Bitcoin, which still has 2.1 million tokens to be mined, the difference between a diluted and regular market cap would be about $135 billion, as of the end of October 2021. We arrived at that difference by multiplying Bitcoin's current price with the total number of BTC that could ever exist — 21 million. Then, we subtracted this dilute market cap figure with the market cap that only accounts for BTC coins that are in circulation.
In summation, investors take market caps as indicators of crypto volatility. Small-cap cryptos are considered those under $1 billion market cap and are exceedingly volatile — susceptible to market moods. Medium-cap cryptos have a valuation between $1 billion and $10 billion. These commonly pose as better investment opportunities because they have more space to grow in, while simultaneously being more stable.
Over $10 billion are large-cap cryptocurrencies. Presently, there are about 30 of them, from Tron (TRX) and Quant (QNT), all the way up to Solana (SOL), XRP (XRP), Ethereum (ETH), and Bitcoin (BTC).
Correspondingly, investors who seek massive gains — up to 100x or even higher in a short time span — often invest in small-cap cryptocurrencies with the hopes of them gaining traction. After all, Bitcoin was once a small-cap crypto, yet look at where it is now.