Value is represented differently by companies and blockchain projects, typically using stocks and digital assets.
Whether or not their value is fully or partially accounted for determines how different their values are in both situations. Market capitalization and fully diluted market capitalization differ in this way.
- The market capitalization of a particular cryptocurrency is calculated by multiplying the price of each coin by the number of coins in circulation for that cryptocurrency.
- When you add the price of each coin to the total number of coins that could exist, you get a diluted market capitalization.
Knowing about the FDV can be helpful when attempting to forecast a cryptocurrency’s future success. Fully diluted market caps are rare, but they offer helpful information.
📊 What Is a Fully Diluted Market Cap?
When all the tokens have been released, a token’s market cap is called its FDV. You can determine a project’s potential market cap using this metric.
Fully diluted valuation, or FDV or the fully diluted market cap, is straightforward. It is based on a market cap, the current total value of all cryptocurrencies in a network.
Instead of focusing on the current circulating coins, the FDV considers the future. In contrast to the conventional market cap metric, a cryptocurrency’s FDV provides the coin’s market capitalization if all conceivable coins were produced.
Remember that the market cap cannot predict future prices after diluting all shares. Instead, it calculates the market cap based on what it would be if all tokens were available and valued at the current market rate.
This is advantageous as it makes it simple to determine whether a cryptocurrency is overvalued or undervalued. When the supply is increased, a sharp change in the market cap may indicate that the coin’s current value is unreliable.
🔎 How Can We Use FDV for Crypto Analysis?
It’s only natural to wonder how reliable FDV is as an assessment parameter after learning how to calculate and use it.
FDV seeks to ascertain whether or not a project’s value is reasonable. After all, coins have been released when the total value of today’s cryptocurrency is very high, it means that there will be more tokens or coins in circulation. This may significantly raise the inflation pressure.
There are many factors to take into account if the total value of the cryptocurrency is high once all coins have been released, including the release date for the subsequent coin or token, the coin’s future circulation, the token’s anticipated growth, and the effect of circulation in exchange for staking.
However, the FDV mechanism has a drawback in that the matrix ignores the possibility of a decline in token price with an increase in circulating supply. To put it another way, FDV always works under the assumption that a token’s rising supply will have no bearing on its current price, so its market cap will increase in line with its current circulating supply in the future.
When estimating a project’s future market cap, FDV ignores many additional factors that could significantly increase or decrease the platform’s value. Some include upcoming project developments, new team members joining or leaving the core development team, competitor developments, future market significance of the project, and so forth.
⚔️ Fully Diluted Market Value Vs. Market Cap
Market capitalization differs significantly from Fully Diluted Market Capitalization. Even though it is frequently used, the term “market cap” is not helpful when assessing a coin’s potential in the future. The size and acceptance of a Crypto can be calculated by dividing the current supply by the price per coin.
While you can think of marketcap as the $ value of “demand” for a project, the FDV is on the contrary, a measure of supply.
The main distinction between a market cap and a fully diluted market cap is that the former does not forecast changes in a cryptocurrency’s level of popularity over time. Once all coins have been made available, a Fully Diluted Market Cap will help you gauge how popular the cryptocurrency is. You can predict a cryptocurrency’s potential future value by taking the time to calculate its Fully Diluted Valuation.
Additionally, combining traditional market cap with FDV Crypto metrics yields a wealth of knowledge about a coin’s current valuation. Market capitalization should be relatively close to Fully Diluted Market Capitalization. However, when there is a significant difference as new coins are issued, there will be strong inflationary pressure. This could mean that the current value of a coin is excessively inflated.
2 significant factors make FDV different from the market cap:
Accuracy: The market cap provides a reasonably accurate indication of a coin’s current value. Since it can only be calculated using current values, the FDV does not account for the cryptocurrency’s potential growth and market acceptance, so it does not provide an accurate picture of the coin’s future value.
Inflationary effect: Another drawback of the FDV metric is that it doesn’t factor in the inflationary effects of the coin’s supply on its price. If a coin’s future supply exceeds market demand, its price and value will fall.
Because of this, a fully diluted market cap shouldn’t be taken seriously as a measurement of a coin’s future value.
🧮 How to Calculate Fully Diluted Market Cap
The maximum supply of any given token must be multiplied by the token’s current market price to determine the FDV of a coin:
Fully diluted market capitalization =
The maximum supply of a coin/token x current token price.
For example, Bitcoin’s maximum supply of coins is 21 million. At its current trading price of $19,099, its fully diluted market cap would be:
21 million x $19,099 = $401,079,000,000
This FDV crypto metric allows investors to understand a cryptocurrency’s future value or market cap if its price remains unchanged until all its coins are sold.
✅ Pros and Cons of Fully Diluted Market Cap
PROS
More accurate representation: Since it considers all shares that might be issued in the future, FDV offers a more accurate representation of a company’s value. This is particularly important for businesses with outstanding warrants, options, and convertible securities.
Comprehensive measurement: FDV thoroughly evaluates a business’s potential market value. It considers all potential future share issuances, which can aid investors in comprehending the full scope of a company’s market capitalization.
CONS
Complexity: FDV can be challenging to calculate and comprehend, particularly for inexperienced investors. Estimating the potential number of shares that might be issued in the future is a tricky part of the calculation.
Overestimation: FDV includes shares that might never be issued, which can result in overestimating a company’s value. For instance, including unexercisable outstanding options in the FDV calculation may cause the company’s market capitalization to increase.
Market volatility: The state of the market may have an impact on FDV. The FDV will decrease along with a significant decline in a company’s stock price, which may give the impression that the company is less valuable than it is.
Low Circulating Supply: A fully diluted market cap primarily draws attention to the fact that a high FDV crypto rating frequently indicates that the cryptocurrency has a small circulating supply.
✨ Examples: High FDVs
Let’s look at a few instances of well-known cryptocurrencies with high, fully diluted valuations.
Avalanche
Avalanche still has many potential tokens to add to the market, with a total supply of over 377 million and a circulating supply of roughly 283 million.
- This implies that Avalanche has a fully diluted valuation of $15.1 billion at its June 2022 token price of $20.95.
- This is roughly three times the $5.9 billion market capitalization of Avalanche.
Despite being on the high side, the FDV crypto rating has not yet reached dangerous levels.
- Since Avalanche is a widely used, open-source cryptocurrency, increased supply is unlikely to outpace demand.
- It’s also important to consider that AVAX has recently experienced a slight decline.
As long as the price remains in the current dip, most investors will still consider AVAX a reliable investment option.
PancakeSwap
Another example of a coin with a low circulating supply is PancakeSwap. Less than half of the 312 million available tokens are currently in use.
- A very high, fully diluted valuation is the result of this. There is a sizable disparity between CAKE’s market cap of $469 million and its FDV crypto value of just over $1 billion.
- Even more troubling is the sudden decline in the value of the coin. It’s a brand-new coin that generated some buzz but has yet to be distributed.
- Most experts think that CAKE no longer holds much promise because so many coins are still available to increase inflation.
🌟 The Importance of Fully Diluted Valuation
Most recently launched blockchain projects aim to enter the market with a low market capitalization to attract investors. For instance, if a project had a $10 million valuation at launch but a $100,000 initial market cap, investors could anticipate a 100x multiplier at TGE if this valuation accurately predicted secondary market demand.
However, most projects must raise money to develop and market a successful product. This sum is typically measured in millions of dollars for even less ambitious projects. Projects typically impose strict vesting schedules on investors to help marry the two — raising sizeable funds and launching with a low market cap to stimulate secondary market demand.
Without working burn mechanics, this inevitably results in significant inflation and sell-side pressure.
As a result, before investing, investors must take the FDV of the project into account.
- If every token were used, its total market capitalization would be calculated as follows: total supply * current market price = FDV.
- If this value is significantly higher than the project’s current market capitalization and its tokenomics are highly inflated, there is a good chance that sell-side pressure will rise sharply.
❇️ Conclusion
A helpful tool for determining whether a coin may be overvalued is the FDV metric. A high, fully diluted valuation typically suggests that a coin may eventually suffer from inflation. Remembering that the fully diluted market cap is merely a tiny portion of the overall picture is crucial. You should also consider pricing trends, market interest, and upcoming project developments.
Different strategies can be used with Fully Diluted Valuation. With Cryptos, not all techniques will function. However, this valuation can be helpful when deciding whether to invest in a brand-new, little-known project. If FDV is significantly greater than the current market capitalization and inflation-inducing tokenomics, the project has a good chance of success.
If you become skilled at performing this analysis, FDV can significantly help you before you purchase the new token. We can say with certainty that this metric is effective. The more analytical tools you employ, the more precise the prediction.