Learn the difference between liquidity and market capitalization before you lose all your money
What is market capitalization and how do we calculate it?
Let's assume we have a coin priced at 1 dollar with a circulating supply of 1,000,000 coins.
To calculate market capitalization, we simply multiply the circulating supply by the current price:
1 dollar × 1,000,000 coins = 1,000,000 dollars market capitalization.
Liquidity is something completely different.
Market capitalization does not indicate the amount of real money within the coin, while liquidity reflects the real money available in the market for that coin.
Liquidity does not have a fixed ratio.
For example, with meme coins, it often ranges from 8% to 12% of market capitalization.
So, a coin with a market capitalization of 1,000,000 dollars may have 80,000 to 120,000 dollars in liquidity.
For coins like Ethereum and Bitcoin, liquidity is much higher.
Liquidity is created in two ways:
It can be added manually by the developer or creator of the coin.
Or, if the coin is launched via a launch platform, the platform automatically creates a liquidity pool.
For this reason, paying attention to liquidity is crucial.
You may buy a coin with massive market capitalization and be in profit, but still be unable to sell due to low liquidity.
