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Fully Diluted Market Cap (FDV)

Feb 22, 2023

What Is Fully Diluted Market Cap?

We will provide a definition valid for the cryptocurrency industry. Fully diluted market cap or fully diluted valuation (FDV) is a metric calculated via the following formula: all the asset units authorized multiplied by the current asset price. When market capitalization takes into consideration only the tokens in circulation, FDV evaluates all the possible forms of an asset, including options, convertible debt, etc.

We can’t say that all investors acknowledge the importance of FDV. Some of them see FDV as misleading and not that helpful. In contrast, others believe this valuation is a crucial component of the overall correct estimation of the potential returns of the project.

Market Cap vs. Fully Diluted Market Cap

Many of us got used to the market cap term. The original notion associated with stocks in the company differs from the market cap in crypto. Stocks can serve as a distributed ownership of the company, and significant shareholders can participate in decision-making processes. The companies sell goods, but they are evaluated not through the volume of their sales but via market capitalization (the combined worth of the company’s stocks). Cryptocurrencies are rated in a similar manner.

The proof-of-stake-based networks have a similar principle. But in general, on the crypto market, the market cap is plainly a product of all tokens in circulation to the asset’s current price. It doesn’t mean anything else. It’s not a distributed ownership of the company. Investors use the market cap to evaluate the cryptocurrency project.

The logic is so simple we can call it primitive — trustworthy projects have huge market capitalization. Investors will wholeheartedly invest in crypto with a $10 billion market cap, while coins with a market cap below $1 million will not be taken seriously.

The market cap of securities and cryptocurrencies can change with time as the number of outstanding units is not constant. It is especially fair for cryptocurrencies. New tokens get issued/minted/mined/unlocked all the time. That’s why for crypto assets, we can use a diluted market cap instead. As cryptocurrency projects usually announce the maximum supply from the very beginning, we can calculate the FDV.

Let’s say Bitcoin is $22,000 today, and 19 million Bitcoins are already in circulation. We know about 4 million is lost, but we won’t consider it. Not because it’s the right thing to do but simply because no one does it. The total supply of Bitcoin is 21 million. Now let’s count. Bitcoin’s market cap is 19 million multiplied by $22,000, which equals $418 billion. The FDV of Bitcoin is 21 million multiplied by $22,000, which equals $462 billion.

Stock investors use FDV to calculate the potential price drop of the asset. We’ll show you the logic behind it using a Bitcoin example. They take the current market cap and divide it by the total supply of coins. It helps to show how much the price can decline when the total amount of the asset units hits the circulation.

$418 billion / 21 million units = $19,619

So if we agree that the Bitcoin market cap is $418 billion and it’s not going to grow, when 21 million Bitcoins are in circulation, the price will drop from $22,000 to $19,619. If the remaining FDV is higher, the potential for a price drop is higher. That’s what investors are trying to learn about the asset using FDV before they invest. However, not everyone believes that FDV is that important.

The Dangers of High Fully Diluted Market Cap

Market cap, as well as fully diluted market cap, are not constants. The fully diluted value changes with time when the asset’s price grows or drops significantly. That’s what happens in the crypto market all the time, making market cap and FDV as volatile as prices. It somewhat decreases the usefulness of FDV of cryptocurrencies.

When the market cap clearly signifies the project’s market presence, FDV is not that straightforward. Coins with colossal market caps are popular. They have a strong trading flow, and people invest in them easily. A cryptocurrency with high FDV can be a relatively new project that is not familiar to the crypto community. For whatever reasons, it can have a hefty price and a considerable remaining amount of unissued tokens that, multiplied by this price, give you impressive FDV numbers.

However, if the project fails to make its way to the top crypto projects, if it doesn’t take off, its value may diminish, and you will find that FDV wasn’t that important at that stage. It’s better to take this measure into consideration when you deal with more or less well-established coins that have already proved the ability to keep their heads above the surface for years.

Another factor that makes FDV unsuitable for some cryptocurrencies is that many have an unlimited supply. It means that inflation can reach high levels. Even though many of these projects have sold significant amounts of tokens in ICO, issuance of new tokens/coins continues at high speed.

Examples of Low Circulating Supply

When new projects sell only a tiny share of their supply (one-third or less) at the initial token sale, they often face a quick drop in value as the new coins/tokens continue to appear on the market fueling inflation. It leads to a decline of interest in the project by investors, stinging the price even worse. That’s why many projects strive to sell over 50% of their total supply in the early days. The lower the FDV / market cap ratio, the better chance the token won’t fall victim to inflation.

A play-to-earn token TryHards is one of the cryptocurrencies that lost its value due to high FDV despite selling 36% of its total supply in the initial sale. Now, early investors don’t have many chances to return on their investments. As of February 10, the TRY price is 99.74% down from the all-time high. The ROI score is negative and close to -100%.

Is Fully Diluted Market Cap a Good Valuation Metric?

You can use fully diluted valuation differently. Not all the ways can be helpful in cryptocurrencies. However, this valuation can help you when you consider whether or not you should invest in a new little-known project. If FDV is considerably higher than the current market capitalization and inflation-provoking tokenomics, then the project doesn’t have a good chance of taking off.

If you become good at doing this analysis before you buy the new token, then FDV can serve you a good service. Definitely, we can’t say anything bad about this metric. The more analysis tools you use, the more precise your picture of the future is.

Conclusion

A fully diluted market cap (or valuation) is one of many tools to help you make a better decision when you think of investing some money in some crypto coin. Thanks to stock traders’ multi-decade experience, we have many valuable tools in cryptocurrency trading and investing.

As the crypto market has its specs, not all of these tools work exactly the same as on the stock market. FDV has its limitations if we use this valuation for cryptocurrencies, but it still helps investors better understand the potential of new names on the market. Just like in the case of trading signals, it’s better to use FDV in combination with other methods of analysis to avoid possible mistakes that can lead to permanent losses.

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