In the world of cryptocurrency, one of the key metrics that investors and analysts use to evaluate the value of a particular token or coin is Fully Diluted Valuation (FDV). Understanding FDV and its role in crypto is essential for making informed investment decisions in the market. In this article, we will delve into the basics of FDV, its calculation, and how to interpret it.
What is FDV?
FDV (Fully Diluted Valuation) represents the theoretical market capitalization of a cryptocurrency if all of its outstanding tokens were in circulation.
It takes into account not only the current circulating supply but also any new tokens that may be created in the future through mining, staking, or token sales.
How to Calculate the FDV metric
You can calculate FDV by multiplying a token’s price by its total number of coins.
For example, if a coin has 300,000 tokens circulating in the crypto market but 500,000 tokens in total supply and the current token price is $2 then the coin’s FDV is:
500,000*$2= $1,000,000
In contrast, its market cap is:
300,000 *$2=$600,000
While the market cap gives you a sense of the value of the coin circulating in the cryptocurrency market today, FDV gives you a sense of how much the coin would be worth if all its tokens were in circulation.
Where can I find the FDV of a coin?
You can find the fully diluted market cap of a cryptocurrency on sites like Coinmarketcap.com and Coigecko.com.
Why do crypto analysts care about FDV?
FDV is a crucial concept in the world of digital assets.
#1. FDV gives you the big picture
Firstly, It provides crypto investors with a more comprehensive picture of a project’s potential market cap.
While market capitalization based on the current circulating supply gives a snapshot of a project’s value at a specific point in time, FDV takes into consideration the maximum supply of tokens, accounting for any potential dilution that may occur.
This gives you a clearer understanding of the project’s overall value.
For example, say someone recommends a coin to you that they think has loads of potential.
You take a look at the market cap and see it’s worth $1Mn.
“Huh!”, you think. “That’s a pretty small market cap but if the project grows it could be worth billions like so many other crypto projects are.”
“I could get 1000x on my initial investment!” you start thinking.
You need to stop yourself right there.
Before you take any further steps you need to look at the FDV of the coin.
Say the FDV is $15Bn. This would imply that:
- The project will issue loads of new coins in the future diluting the value of your holdings
- The cryptocurrency project is overhyped and the price will likely fall in the future.
#2. FDV is a better way to compare coins
Secondly, FDV allows for a more accurate comparison between different cryptocurrencies.
Two coins may have the same market cap but very different FDVs.
This indicates that there are going to be a whole more tokens coming on the market in the future exerting a dilutive pressure on existing tokens.
This may or may not be already captured in the price of the token.
However, by looking at the FDV you can figure out that these crypto protocols are not equal in their nature.
When doing your own research you need to look at both metrics.
For example, both Aptos (APT) and Maker (MKR) have a current market capitalization of $1.2Bn.
However, the fully diluted market cap of Aptos is 5 times larger than that of Maker’s.
It’s hard to compare prices between the two because they have very different circulating supplies.
Maker has just under 1 million coins in circulation whereas Aptos has 250 times that.
If I were to normalize them then I would get the price of Aptos to equal:
236,013,442 / 977,631 * 5.17=1248
which is close to the current price of Aptos.
Both projects are similar in price but one is going to have 5 times more coins coming on the market.
If I think that Aptos is so amazing that it’s 5 times better than Maker then the price is justified.
But if I don’t then Aptos seems to be overvalued.
Obviously, you need to know more about Aptos and Maker to make that decision. And this is how you do your own research in crypto.
Incidentally, I have written an explanation for both MakerDAO and Aptos if you want to learn more about these projects.
#3. FDV shows you the long-term scenario
Investors and analysts often use FDV as a tool to evaluate the long-term potential of a cryptocurrency.
If a project has a significant amount of tokens yet to be issued, it can lead to dilution and potentially affect the value of existing tokens.
Understanding FDV helps investors assess the future supply dynamics of the cryptocurrency and make better-informed decisions.
Things to be careful of when looking at FDV
Future token issuance is a crucial element in FDV calculation.
This includes any tokens that may be mined, staked, or sold through token sales in the future.
A high FDV compared market cap of a project could indicate that the project is overpriced and that the market has not taken token inflation into account.
Note that when you look at the listed FDV on sites it might not capture the whole picture.
For example, if you look at the total supply of Dogecoin on Coinmarketcap it equals the circulating supply. This might make you think that no more DOGE will be minted.
However, this is not true.
DOGE supply increases by about 4% per year.
So you need to be savvy and research the coin well especially when considering inflationary tokenomics.
FAQs
Is a high fully diluted market cap good?
It depends on the context but a high FDV could indicate that a project is overvalued or over hyped especially if it is exceedingly high compared to its market cap.
What is a low volume token?
A low volume token means there is not enough liquidity in the market for that token to trade. So for example when you try to sell a low volume token it won't be as easy to find a buyer and vice versa.
Is it better to have a higher market cap?
In general a higher market cap indicates that the market values the crypto project more. Other metrics to look at are the fully diluted market cap and the total value locked. You should also assess the backgrounds of the founders and development team, wether they are anonymous or not and the nature of the project itself.
How do you use FDV?
You use FDV in combination with other metrics such as the market cap to assess if the project is overvalued or not.
Other metrics used in valuing a crypto
Other than FDV the following metrics are useful when assessing the value of a coin
- Market Capitalization= price * circulating supply gives you a sense of how the market values a crypto coin
- Total Value Locked (TVL) is a useful metric that shows you the value of the assets that are locked up in the protocol via staking. A high TVL indicates a robust blockchain network with long-term holders who prefer to stake rather than trade the coin.
- 24-hour volume: how much the token was traded in the last 24 hours. It indicates whether the asset is liquid and if there is trading interest in it.
- Market cap / TVL: gives you a sense of how much value is circulating vs locked.
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