Key Takeaways:
- Fully diluted valuation (FDV) refers to the total market capitalisation of a cryptocurrency if all possible tokens were in circulation, calculated as the current token price multiplied by the total supply.
- FDV offers a more complete perspective of a cryptocurrency’s potential market value compared to the current market capitalisation, as it accounts for future token issuance.
- Useful for comparing different cryptocurrencies, FDV helps assess risks and opportunities. A high FDV relative to market cap may indicate potential future dilution and associated risks.
- Understanding FDV helps traders make informed decisions about long-term strategies, portfolio diversification, and potential market volatility.
Introduction
Amongst the various metrics and concepts essential for understanding the cryptocurrency market, fully diluted valuation (FDV) stands out as a crucial one, providing an indication of a cryptocurrency’s potential market value. This article delves into the intricacies of fully diluted valuation, explaining its definition, calculation, significance, and implications for the cryptocurrency market.
What Is Fully Diluted Valuation (FDV)?
Fully diluted valuation (FDV) refers to the total market capitalisation of a cryptocurrency if all possible tokens or coins were in circulation. This metric considers not only the tokens currently in circulation but also those that could be issued in the future through mechanisms like mining, staking, or vesting schedules. Essentially, FDV provides an estimate of the maximum potential market value of a cryptocurrency.
Learn more about crypto market caps.
How FDV Is Calculated
The calculation of FDV is straightforward:
FDV = Current Price of the Token × Total Supply of the Token
Here, the ‘Total Supply of the Token’ includes both the circulating supply and any additional tokens that could be created or unlocked in the future. For instance, if a cryptocurrency has a current price of $10 and a maximum total supply of 100 million tokens, its FDV would be $1 billion.
FDV Example Calculation
Let’s use Bitcoin (BTC) as our example cryptocurrency.
We assume the current price of Bitcoin is $65,000 per token and that there are 19,745,500 BTC currently in circulation. The total supply of Bitcoin is capped at 21 million BTC.
The FDV of Bitcoin can be calculated as follows:
FDV = 65,000 × 21,000,000 = 1,365,000,000,000
Thus, the fully diluted valuation of Bitcoin is $1.365 trillion.
What Is FDV Used For?
Providing a Complete Market Perspective
FDV offers a more comprehensive view of a cryptocurrency’s market potential than the current market capitalisation, which accounts only for the circulating supply. By considering the total supply, FDV helps traders understand the full scope of a cryptocurrency’s valuation, including future token issuance.
Comparing Different Cryptocurrencies
FDV is particularly useful for comparing the valuations of different cryptocurrencies. Two cryptocurrencies with similar current market capitalisations may have vastly different FDVs, indicating different levels of potential future dilution. This can be a critical factor for traders when making decisions.
Assessing Risks and Opportunities
Understanding FDV helps traders assess the potential risks and rewards associated with a particular cryptocurrency. A high FDV relative to the current market capitalisation might indicate significant future dilution, which could impact the price per token. Conversely, a lower FDV might suggest less future dilution and potentially greater price stability.
Case Studies: FDV in Action
Bitcoin (BTC)
Bitcoin, the first and most well-known cryptocurrency, has a fixed total supply of 21 million coins. As of August 2024, over 19 million BTC are in circulation. The FDV of Bitcoin is calculated by multiplying the current price by the total supply of 21 million coins, as in the example above. Bitcoin’s FDV is straightforward to calculate due to its fixed supply.
Ethereum (ETH)
Ethereum presents a more complex case, as Ether (ETH) has infinite total supply. The circulating supply and total supply are the same. Therefore, crypto trackers will state ETH’s FDV as the same as its market cap.
Solana (SOL)
Solana (SOL), on the other hand, uses token burns as a disinflationary measure (i.e., to reduce inflation rate over time). Solana’s target is a 1.5% total inflation rate, a combination of the actual inflation rate and the reduction that token burns bring. As of August 2024, Solana’s circulating supply is 466 million, while its total supply amounts to over 582 million. Therefore, at a price of $135, we can calculate its fully diluted valuation as over $78 billion, while its market cap sits over $68 billion.
In other words, Solana’s FDV is higher than its market cap.
Is It Good or Bad if FDV Is Higher Than Market Cap?
A higher FDV compared to the current market cap typically means there are more tokens yet to be released into circulation. While an FDV higher than the current market capitalisation is not inherently bad, it has several important implications:
Risks
- Potential Dilution: Future token releases can dilute the value of existing tokens, impacting traders, which can be mitigated by token burns, like in the case of Solana.
- Overvaluation: The cryptocurrency might be overvalued based on speculative future growth rather than present realities, leading to potential market corrections.
- Increased Volatility: Anticipation of future token releases can contribute to market volatility and price fluctuations.
Opportunities
- Growth Potential: Additional tokens can be used to incentivise participation, foster ecosystem growth, and fund future development.
- Long-Term Planning: A well-structured token release plan can support the long-term success and sustainability of the project.
- Trader Expectations: A higher FDV might reflect trader confidence in the project’s future prospects and growth potential.
Factors Influencing FDV
The main factors that influence FDV are tokenomics, market sentiment, and price volatility.
Tokenomics and Supply Dynamics
The structure of a cryptocurrency’s tokenomics plays a crucial role in determining its FDV. Factors like the initial coin offering (ICO) distribution, mining rewards, staking incentives, and vesting schedules for team members and advisors can all influence the total supply and, consequently, the FDV.
Future Token Issuance
Cryptocurrencies often have mechanisms for future token issuance, such as mining and staking. These mechanisms can lead to an increase in the total supply over time. Understanding the rate and conditions of future token issuance is essential for accurately estimating FDV.
Market Sentiment and Price Volatility
Market sentiment and price volatility can also impact FDV. Sudden price changes can significantly alter the FDV calculation. Therefore, it’s important to consider the volatility of a cryptocurrency when analysing its FDV.
Why Pay Attention to FDV?
FDV is not a crystal ball, but it can give an indication of future trends for an asset.
Traders with a long-term perspective usually pay close attention to FDV. Cryptocurrencies with high FDVs may face downward price pressure as new tokens are introduced into the market, unless they are burnt. FDV is also valuable to consider for portfolio diversification. By comparing the FDVs of different cryptocurrencies, traders can build a diversified portfolio that balances potential risks and rewards.
Challenges and Limitations of FDV
One of the primary challenges of FDVs is accurately predicting future token issuance. Cryptocurrencies often have complex mechanisms for token creation, making it difficult to accurately forecast the total supply. Changes in protocol, governance decisions, and market conditions can all impact future token issuance.
FDV can also be influenced by market manipulation and speculative behaviour. Sudden price surges or drops, driven by speculative trading, can distort the FDV calculation. Traders must be cautious and consider the potential for market manipulation when analysing FDV.
Finally, new technologies, regulatory changes, and market trends can all impact the FDV of a cryptocurrency. Stay informed about the latest developments and be prepared to adjust analyses accordingly.
Conclusion
Fully diluted valuation (FDV) is a vital metric in the cryptocurrency market, providing a more comprehensive view of a cryptocurrency’s potential market value than market cap alone. By considering the total supply, including future token issuance, FDV offers valuable insights for traders.
However, analysing FDV also comes with challenges, including predicting future token issuance, especially for tokens with infinite supply like ETH, and navigating market manipulation. Traders should consider approaching FDV with a nuanced understanding and stay informed on the dynamics of the cryptocurrency market.
Due Diligence and Do Your Own Research
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Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a digital asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.
