Market capitalization represents the total value of a cryptocurrency, calculated by multiplying the current price by the circulating supply. This metric is a rough gauge of a project's size and relative importance in the crypto ecosystem. A token trading at $10 with 100 million tokens in circulation has a $1 billion market cap. Market cap creates natural tiers: Bitcoin and Ethereum dominate as mega-caps, while mid-caps, small-caps, and micro-caps descend in size and typically increase in risk. However, market cap is deeply flawed as a valuation metric. Low-liquidity tokens can show massive market caps that would collapse instantly if holders tried to sell, the order books simply don't have enough depth to absorb meaningful selling pressure. This creates an illusion of value that doesn't exist in practical terms. Fully diluted market cap (FDV) multiplies price by total maximum supply, including locked, vesting, and unreleased tokens. FDV reveals future dilution: a token with $1B market cap but $10B FDV has 90% of its supply yet to hit the market, creating potential sell pressure. Comparing market cap to FDV indicates how much supply overhang exists. Market cap also ignores velocity: how often tokens change hands, which affects actual economic activity.
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