Fully Diluted Market Cap (FDV): Understanding a Token’s Value
When you're trying to predict a cryptocurrency's future success, knowing about the FDV can be helpful. Though fully diluted market caps aren't a common metric, they provide some useful insight. This guide will help you learn how to calculate and analyze fully diluted market caps so you can pick promising cryptos.
What Is Fully Diluted Market Cap?
A token’s FDV refers to the token's market cap once all the tokens have been released. This metric lets you compute a project's future market cap.
The fully diluted market cap — also known as fully diluted valuation, or FDV — is a simple concept. It builds on the idea of a market cap, which means the total value of all crypto in a network at any given point. The FDV, however, looks at the future instead of the coins currently available. Compared to the traditional market cap metric, a crypto’s FDV tells you what the coin's market cap would be if all possible coins were issued.
Keep in mind that the fully diluted market cap doesn’t predict later prices. Rather, it sees how much the market cap would be if all tokens were available and worth the current market price. This is helpful because it makes it easy to see if a crypto is overvalued or undervalued. If the market cap changes drastically when supply is increased, it can be a sign that the coin's current value is incorrect.
What Is the Method for Calculating a Fully Diluted Market Cap?
Calculating FDV is elementary. Start by collecting two pieces of data: The maximum amount of tokens a crypto will release, and the current market value for a token. Multiply these two numbers together, and you’ll have the fully diluted market cap.
For example, consider Bitcoin. Right now, there are roughly 18.9 million bitcoins in existence, but theoretically, up to 21 million Bitcoins could be mined. Bitcoin's price is $21,088 as of July 2022. Therefore, the fully diluted valuation would be roughly 442.8 billion. Ultimately, this FDV tells you what Bitcoin's market cap would look like if all 21 million Bitcoins were in circulation right now.
Market Cap vs. Fully Diluted Market Cap
Remember that a fully diluted market cap is different from a market cap. The term “market cap” is used a lot, but it's not helpful for considering the future of a coin. It’s calculated by multiplying the current amount of coins by the price per coin, which helps to show the size and popularity of a cryptocurrency.
However, the biggest difference between market cap and fully diluted market cap is that a market cap doesn't indicate how the crypto's growth will affect its popularity. A fully diluted market cap gives you an estimate of how popular a crypto would be once all of its coins are released. Taking the time to calculate a crypto's fully diluted valuation allows you to consider what the coin's value might be like in the future.
Furthermore, using FDV crypto metrics alongside standard market cap gives a lot of insight into a coin's current valuation. Ideally, the difference between the market cap and the fully diluted market cap should be fairly low. A drastic difference indicates there’ll be a lot of inflationary pressure as new coins are released. This can be a warning sign that a coin's current value is overinflated.
The Dangers of High Fully Diluted Market Cap
To better understand why FDV crypto ratings are important, take a close look at the problems associated with an abnormally high, fully diluted market cap. Fully diluted valuations are mainly important when the rate is much higher than the current market cap. There's no set limit for when a fully diluted market cap becomes dangerous. However, the general rule of thumb is that an FDV of more than 10 times a token's current market cap is a warning sign. Excessively high, fully diluted market caps are associated with two problems.
A high ratio of market cap to fully diluted market cap is a problem because it shows the coin will be subject to inflation. Since crypto prices are determined by supply and demand, a coin that’s currently priced high but will soon have more tokens on the market is a risk. A high fully diluted market cap means current sellers have to pay a lot for a limited number of coins, but soon the market will be flooded with a large supply. This increase in supply tends to drive down the value of a coin unless it’s in high demand.. As past projects like TryHards (TRY) have shown, most cryptos with inflationary pricing schemes and tokenomics end up losing value very quickly.
High Sell-Side Pressure
Even if you don’t plan on keeping the crypto for years, a high fully diluted market cap can still cause issues. As the FDV crypto metric becomes more popular, more investors will use it to make their decisions. If a crypto has a high fully diluted valuation, many of these investors might assume it’s overvalued. This often encourages owners to sell their tokens. The high sell-side pressure, caused by a high FDV crypto rating, can affect current prices.
Examples of Low Circulating Supply
As you can see, the main issue highlighted by a fully diluted market cap is that a high FDV crypto rating often means the crypto has a low circulating supply. Does a low circulating supply with a high potential supply in the future automatically spell doom for a crypto? Not necessarily. Let's take a look at some examples from popular cryptos with high fully diluted valuations.
With a circulating supply of roughly 283 million and a total supply of over 377 million, Avalanche still has a lot of potential tokens to add to the market. With its June 2022 price of $20.95 per token, this means Avalanche has a fully diluted valuation of $15.1 billion. This is roughly three times Avalanche's current market cap of $5.9 billion. Though the FDV crypto rating is on the high side, it hasn’t reached dangerous levels. Avalanche is an open-source, scalable crypto with many uses, so it's unlikely that extra supply will outpace demand. It's also worth considering that AVAX has had a slight dip in the past few months. As long as the price remains in the current dip, most investors still will consider AVAX to be a reliable investment option.
PancakeSwap is another example of a coin with a low circulating supply. Its total supply is 312 million tokens, but less than half of that is in circulation. This has led to a very high fully diluted valuation. CAKE's market cap is $469 million, while its FDV crypto value is a little over $1 billion — a fairly drastic difference. The coin's sharp downturn makes it even more concerning. It's a fairly new coin that got a little buzz, but hasn't really delivered. With so many coins left to cause further inflation, most experts believe that CAKE no longer holds much promise.
Curve DAO (CRV)
With a circulating supply of 488 million and a total supply of 1.7 billion, Curve DAO still has a lot of tokens left. So it's no surprise that its FDV crypto rating is far higher than its market cap. The current market cap as of June 2022 is $571 million, while its fully diluted valuation is a little over $2 billion. If you look at these numbers, Curve DAO seems like a poor choice, but it's worth noting that this token isn't just for trading. It's an Ethereum-based token that the stablecoin trading market, Curve, uses to swap between similar ERC-20 tokens. Therefore, the coin has some uses that can make it helpful, despite the high fully diluted valuation. However, it's not a good coin for dumping all your investment money into.
Is Fully Diluted Market Cap a Good Valuation Metric?
The fully diluted market cap is certainly a valuable way of considering a coin's future. Unlike exchange flow metrics, it takes into account future coin supply. This helps you avoid making poor decisions because you didn't realize inflation was about to occur. Comparing the fully diluted valuation and the current market cap make it easy to notice when a coin's current price is a little too high. In most cases, coins with a high FDV aren't coins you want to put all your money into. Instead, you may want to consider selling before inflation reduces the worth of your current coins.
That being said, you can’t just look at the market cap versus the fully diluted market cap and make your decision. A high FDV crypto ranking isn't necessarily a death sentence for a crypto. As long as coin demand remains high, increased supply won't always tank the price. As we saw from our examination of high FDV cryptos, a few rare coins can keep going strong despite a high FDV. Furthermore, most fully diluted valuations aren't an accurate predictor of price. You should never make a decision by assuming the fully diluted valuation will be the true market cap in a few years.
This is why it’s essential to consider a coin's complete tokenomics. You need to take the time to analyze pricing data and learn how a coin really works. For example, looking at the core development team’s activity cases and use cases can help you notice if a coin is going to have helpful future applications that will increase demand. In the long run, FDV is a helpful tool, but it isn't a substitute for thorough research.
The Bottom Line
Ultimately, the FDV crypto metric is a useful way of seeing whether a coin might be overvalued. A high fully diluted valuation usually indicates that a coin might be harmed by inflation later on. However, it's important to keep in mind that the fully diluted market cap is only one part of the big picture. You also need to consider things like pricing history, industry interest and future project developments.