Market capitalisation is the last traded price multiplied by the number of units in circulation. It is used to rank assets and to size positions, and it is the single most misread number in the subject. It does not measure how much money has gone into an asset, and it cannot be withdrawn from it. It is an extrapolation: the price of the most recent marginal trade, applied to every unit in existence as though all of them could be sold there.
The gap between the two is largest exactly where it is most misleading. A token with thin order books can have most of its supply held by a handful of addresses that have never sold. A few million dollars of buying can move the price enough to add hundreds of millions to the headline figure, and a few million of selling can remove it just as fast. The number moves because the marginal price moved, not because anything was invested or withdrawn.
Which supply figure is used matters as much as the price. Circulating supply counts units that are actually liquid and excludes those locked in vesting contracts, held in a treasury or reserved for future emission. Fully diluted valuation multiplies the price by the maximum supply that will ever exist. For a young token with most of its allocation still to unlock, these two numbers can differ by a factor of ten. A token that looks small by circulating capitalisation and enormous when fully diluted is telling you that a great deal of supply is scheduled to arrive.
Circulating supply is also an estimate rather than a fact. Deciding which addresses count as circulating requires judgement about treasuries, foundation holdings, bridged copies of the same token on other chains, and coins provably lost. Different data providers make different calls and publish different figures for the same asset on the same day. Where the number matters, it is worth checking which methodology produced it.
The same arithmetic applied to the whole market produces total capitalisation, and it inherits every one of these problems while adding another: much of that total sits in tokens whose price is set by shallow pools, and a meaningful slice of it is stablecoins, whose capitalisation is a measure of issuance rather than of valuation. Total capitalisation is a useful shape over time and a poor measure of anything on any given day.
Used carefully, the number is still worth having. It puts assets on a comparable scale, it makes the concentration of the market visible, and a large change in it is a reasonable signal that something happened. Used carelessly — as a claim about money at stake, or as evidence that a position could be exited at the quoted price — it is worse than no number at all.