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Should I buy cheap cryptocurrency coins/tokens?

by | Dec 17, 2017

Many people want to buy coins with a really low price. They hope that one day, the price per coin is going to reach the same level as Bitcoin, making them instant billionaires. Unfortunately, focusing on only the price is not an accurate way to compare coins and predict their future value. Instead, you should be looking at something called the market capitalization, which is defined as the total value of all circulating coins out there. To find the market cap of XYZ coin, you would use the following formula:

Market cap of XYZ coin = (price per XYZ coin) * (# of XYZ coins circulating).

Think about it this way, just like different companies issues different amounts of stock, different coins vary in the total number of coins circulating the market. If a small startup issues 10 shares of stock and each one is worth $1000, their total market cap would be $10,000. Meanwhile, if Apple stock is only worth $200 per share, does that mean Apple stock has a better value and more growth potential? Quite the opposite – the small startup with a higher price per share more likely has higher growth potential because their company value could more conceivably grow 10x, whereas Apple is already dominant in their industry (not as much room for growth).

Turning back to coins, that’s why a coin worth $0.01 does not mean it’s a better buy than a coin worth $1000. Most of these coins have a really high circulating supply already – e.g. Ripple (XRP) is around $0.25 but has a circulating supply of 38.6 billion. Meanwhile, Bitcoin is worth $10,000 but it’s circulating supply is only 16.7 million. So for XRP to even reach $10 per coin, its total market cap would need to roughly double Bitcoin’s current market cap.

Let’s look at the math:
($10 target price / $0.25 current price) = 40 (price multiplier)
40 * $9.7 billion XRP market cap = $388 billion target market cap (if the coin was $10)
$388 billion / $185 billion (Bitcoin’s current market cap) = 2.09 (market cap multiplier)

This means that you would expect Ripple to eventually double Bitcoin’s current market cap in order to reach a target price of $10. We are talking about doubling a coin that is the granddaddy of all cryptocurrency, has a long track record, is accepted by many businesses, and has by far the best mainstream recognition. It may be possible, but it will likely require the entire cryptocurrency market to rise to much higher depths.

The question boils down to this – do you think that a particular coin will become more valuable than Bitcoin currently is, by whatever market cap multiplier you calculated? If one of your coins requires reaching 100x of Bitcoin’s current market cap in order to make you a millionaire, its usage would likely need to be so pervasive throughout society that everyone would be using it in some way.

Just a quick note that the example above was pretty conservative. If you need XRP to hit $100 or $1000 in order for you to become a millionaire, you may be waiting forever. Those prices are orders of magnitude more difficult to reach. That means you would need to reach 20x or 200x of Bitcoin’s current value in order to hit that level – frankly an unrealistic expectation, but hey who knows what can happen in this crazy space!

Further Reading: How to use volume indicator when trading cryptocurrencies

Disclaimer:

This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.

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