Two Key Factors That Govern The Micro-Cap Market

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12 Jun 2024

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An Undiscovered Gold Mine
The micro-cap market is much like land laden with gold and precious metals yet to be discovered. Apart from the gains, the intrigue and mystery of this particular sector can be rather captivating to altcoin investors and gem seekers alike. Solana has a significant market cap and enjoys mainstream adoption. However, things were different in 2020. At one point, Solana’s market cap was below $15 million.
As staggering as that sounds, it could have been much lower, as this figure incorporates the current circulating supply. There has been significant inflation regarding Solana’s circulating supply since its inception. What some cannot realize is that altcoins are inflationary-based assets. Are you earning staking rewards? Those rewards are new coins coming into circulation and being rewarded to those securing the chain.
It’s the same principle as Bitcoin mining. The protocol rewards those securing and verifying on-chain transactions. Whether the protocol is SHA-256, PoS, or DPos, the principle remains the same: Inflation provides the rewards. As I have previously stated, finding micro-cap PoS projects can be one of the most viable, if not the best investment decisions.
Market Cap
There are however two key dynamics that are at work within the micro-cap sector. The first is the market cap valuation of the particular asset in question. Projects that have a market cap valuation of approximately $20 million or lower make for a good investment, provided they meet the criteria. The low market cap is directly related to any significant surge in investor sentiment.
For example, Bitcoin’s current market cap is approximately $1.3 trillion and trades $22 billion in 24 hours. This implies that only 1.6% of Bitcoin’s market cap valuation is traded daily. The enormous market cap does not allow significant price movement. Now imagine what happens when a $20 million project attracts investment capital of even $2 million.
It’s only $2 million but the entire market cap is a mere $20 million and what you have as a direct result is a massive spike in the price. Additional investment continues to push the price significantly higher until a balancing effect begins to kick in. This is directly linked to the second dynamic that governs this highly volatile market.
Volume
Smaller projects have fewer investors, and as a result, there are few sellers. Furthermore, most of these investors have a long-term horizon, as they are awaiting an expected price explosion. When an overwhelming group of buyers meets a rather conservative group of sellers, a similar scenario plays out as in the case of the abovementioned market cap dynamic.
A balancing effect begins to unfold once the majority of investors have entered the market. Along with these investors come speculators (traders) ready to capitalize on the daily price movements of the asset in question. This increases the liquidity and the market cap. As a result, the trading range is, for the most part, tamed. The asset can still enjoy a price surge, just a lot more controlled.
Not only is it now controlled, but the timeframe is a lot longer, regarding larger price moves. Only micro-caps can provide accelerated price growth, as they have the fundamentals required to create it. A low market cap project with insignificant volume will explode if significant partnerships, adoption, and positive investor sentiment meet it.

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Final Thoughts
Micro-caps continue to provide great investment opportunities thanks to the abovementioned dynamics. However, choosing the correct projects is imperative. Furthermore, most micro-caps that explode usually have a prolonged period of what appears to be stagnation, before taking off. It’s a risky environment, so conduct your own due diligence. That’s it for this one. See you next time!

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Disclaimer
First of all, I am not a financial advisor. All information provided on this website is strictly my own opinion and not financial advice. I do make use of affiliate links. Purchasing or interacting with any third-party company could result in me receiving a commission. In some instances, utilizing an affiliate link can also result in a bonus or discount.
This article was first published on Sapphire Crypto.