What Is Fully Diluted Valuation (FDV) In Crypto
What Is Fully Diluted Valuation (FDV) In Crypto.
Key Takeaways
- FDV is a future-oriented metric; it projects a cryptocurrency’s theoretical market value if its entire potential supply were in circulation.
- FDV helps investors assess whether a project has room for growth based on its maximum supply, as opposed to the value of its circulating supply, represented by market cap.
- Combine FDV with market cap, on-chain analysis, and fundamental analysis for a comprehensive understanding of a cryptocurrency’s value and potential.
- FDV has limitations. Factors like market response to token release schedules, project fundamentals, and market sentiment all influence real-world price behavior.
Fully diluted valuation (FDV) is a metric developed for the cryptocurrency market, incorporating unique industry elements such as circulation and total supply, which are generally not considered in traditional markets.
While the concept of FDV originated in equity markets, its application in crypto helps investors assess the potential economic impact of a coin or token if all existing and potential assets were in circulation.
Fully Diluted Valuation (FDV), Explained
FDV calculates the theoretical market value of a cryptocurrency by assuming that all its intended supply is already issued and circulating at the present market prices.
In contrast, market capitalization, commonly known as market cap, is a way to measure the overall size of a cryptocurrency project. It’s calculated by multiplying the current price of a single coin or token by its total circulating supply.
In traditional finance, this concept is often explained by “fully diluted shares outstanding.” This refers to the total number of shares a company would have in circulation if all potential sources of additional shares were exercised or converted.
The Role Of Fully Diluted Valuation In The Crypto Market
Investors can visualize a project’s prospective size and market share if all of its planned total supply is made available with the use of FDV. To understand the role of FDV in the crypto market, this article will use Bitcoin for illustrative purposes.
FDV In The Bitcoin Context
- Limited supply: Bitcoin is well-known for having a hard cap of 21 million coins and a carefully controlled mining release schedule. Its FDV is hence rather predictable and evident.
- Evaluating price potential: Investors can make informed decisions: whether Bitcoin’s price has the ability to rise as its supply grows over time by comparing the present market cap to the FDV.
- Long-term outlook: When mining rewards start to decline and all 21 million Bitcoins are in circulation, investors can gauge the cryptocurrency’s possible market worth according to its FDV.
Considerations And Cautions While Using FDV In The Crypto Market
- Deflationary vs. inflationary: FDV is crucial for evaluating deflationary coins, such as BTC, and inflationary ones like ETH, whose supply rises.
- Volatility: FDV by itself is unable to forecast abrupt changes in price due to the extreme volatility of cryptocurrency markets.
- Not a sole predictor: FDV is just one instrument available. The adoption, competitiveness, and roadmap of a project all affect its long-term cost and likelihood of success.
How To Calculate Fully Diluted Valuation
FDV can be calculated using the below formula:
- FDV = Current Price per Coin/Token x Total Supply
where, the market value of a single currency or token at a given moment is known as the current price per coin or token, whereas total supply represents the maximum number of coins or tokens that will ever be created according to the project’s protocol.
Let’s understand the above formula using Bitcoin as an example.
Example: Calculating Bitcoin’s FDV
- Current price: Assume the current price of Bitcoin (BTC) is $63,000.
- Total supply: Bitcoin’s total supply is capped at 21 million coins.
FDV (BTC) = $63,000/coin x 21,000,000 coins = $1,323,000,000,000 (or $1.323 trillion)
The above calculation indicates that the FDV of Bitcoin is roughly $1.323 trillion USD. This is the estimated market value of Bitcoin at the current price of $63,000 per coin, assuming that all 21 million coins are in circulation.
However, please remember that FDV is a hypothetical value, whereas market cap reflects the current total value of all circulating coins.
Limitations Of The Fully Diluted Valuation Metric
While FDV offers valuable insights, it’s important to be aware of its limitations:
- Theoretical value: If every coin or token that might ever be created were already in circulation, the FDV is a fictitious assessment of a cryptocurrency’s potential market worth. It does not imply that this goal will ever be accomplished in the real world.
- Limited attention to fundamentals: FDV frequently overlooks important fundamental elements including a project’s technology, adoption rate, team strength, and general market conditions in favor of concentrating exclusively on supply and price.
- Disregards token release date: Regardless of a project’s release date, FDV handles all possible tokens as though they were instantly available. For projects that intend to deliver tokens gradually or in stages, this may be deceptive.
- Possibility of manipulation: Projects with a large proportion of uncirculated tokens may theoretically exaggerate their FDV to attract investors who might not carefully examine the specifics.
- Possible market dilution: When more tokens are put into circulation, the market may respond differently, and this is not taken into consideration by FDV. A flood of fresh tokens could dilute the value.
Fully Diluted Valuation Vs. Market Capitalization: Which Is A Better Metric?
FDV and Market Cap are two metrics that are used to assess the size and potential of a cryptocurrency project, although they provide distinct viewpoints.
Market Cap, which simply takes into account the quantity of currencies or tokens in circulation and their current market value, represents the current state of a project. FDV, on the other hand, adopts a forward-looking strategy, projecting the project’s total value assuming that all feasible coins or tokens are currently in use.
In simple terms, FDV estimates the value of all the chairs the room could potentially hold, while market cap shows the value of all the chairs currently in the room.
Here are the possible differences between the two concepts:
| Aspect | Fully Diluted Valuation | Market Capitalization |
| Components | All issued tokens + potential | Currently circulating tokens |
| Calculation | Total possible tokens | Current price x circulating tokens |
| Reflects | Broader token potential | Current market sentiment towards tokens |
| Common usage | Assessing future token dilution | Evaluating current token value |
| Impact | Potential token dilution | Current token holder’s stake |
By understanding key scenarios where each metric is effective, one can decide which metric is more relevant to their specific analysis:
When To Prioritize Market Cap
- Short-term trading: Market cap, which is more responsive to recent market fluctuations, is a superior indicator if you’re focused on short-term trends and price activity.
- Assessing current value: A cryptocurrency project’s market capitalization indicates its current market value.
- Evaluating liquidity: Market capitalization provides information about how simple it is to buy and sell large quantities of a cryptocurrency without significantly altering its price.
When To Prioritize FDV
- Long-term investment: If a project’s total coin or token supply hasn’t yet been distributed, FDV is essential for estimating the project’s potential size and worth over time.
- Finding undervalued assets: If a coin’s market cap is much less than its FDV, it may be undervalued. However, further analysis may yield better insights.
- Comparing projects: FDV can provide a more level playing field when comparing projects with varying token supplies or release dates.
An Ideal Approach To Choose Market Cap Vs. FDV
Investors should ideally take into account both market cap and FDV in addition to additional metrics such as:
- Project fundamentals: The team behind the project, roadmap, and practical applications.
- Token distribution: Knowledge of the distribution of tokens helps understand how their distribution affects their possible value and scarcity.
- Market sentiment: It refers to how people generally see a project and any associated hype.
Alternative Metrics To Complement Traditional Market Cap And FDV In Crypto Asset Analysis
The below alternative metric can help address the limitations of FDV and market capitalization metrics. However, it is important to note that not all metrics are equally applicable to all cryptocurrencies. For example, hash rate matters more for proof-of-work (PoW) coins, while TVL is most relevant to DeFi tokens.
Total Locked Value (TVL)
The TVL metric focuses on the entire amount of assets deposited into decentralized finance (DeFi) protocols. It is a crucial indicator of the expansion and uptake of the DeFi market and can aid in assessing the level of popularity of particular DeFi platforms.
On-Chain Metrics
There are various on-chain metrics that can provide broader insights into the performance of crypto assets. Some examples include:
- Active addresses: It refers to the total quantity of distinct addresses involved in transactions; it aids in measuring network activity.
- Transaction volume: The total amount of money moved over a given time period on the blockchain is called transaction volume. It reveals levels of usage and adoption.
- Network hash rate: The amount of processing power devoted to blockchain security is known as the network hash rate. Increased network security and possible mining difficulties are indicated by higher hash rates.
Social And Development Metrics
Monitoring interactions and conversations within communities on platforms like Discord, Reddit and Twitter may provide insights into public perceptions.
Moreover, keeping an eye on developments on GitHub and other platforms may help understand how developers are keeping up with the project . For instance, frequent commits and code changes show the health of the project and the dedication of the developers.
Conclusion
FDV provides investors in cryptocurrencies with an insightful long-term outlook. It assists in visualizing future market size and potential price trajectories by taking into account a project’s complete potential supply.
However, it’s crucial to keep in mind that FDV is only a theoretical value. Combine FDV with market capitalization, circulating supply analysis, and in-depth investigation of a project’s foundation, team, and competitive position for the best informed decisions.
When utilized wisely, FDV can be an effective instrument in a more comprehensive cryptocurrency investing plan.
FAQs
Unfortunately, projects with large uncirculated token supplies could theoretically inflate their FDV for marketing purposes. Always verify the total and circulating supply figures on independent sources, and don’t rely on FDV alone. There’s no “perfect” FDV. The ideal depends on a project’s goals, tokenomics, and the overall market. Comparing FDV across similar projects can provide insights into relative potential valuation. FDV is directly tied to the current market price of the cryptocurrency. Since cryptocurrency prices are volatile, the FDV of a project will fluctuate even if the maximum supply of tokens remains unchanged.Can FDV be manipulated?
Is there an ideal FDV range?
Why does FDV change even if the total token supply is fixed?
