The Fully Diluted Valuation (FDV) is an important metric in the cryptocurrency space that helps investors understand a project's potential market value. It represents the total market capitalization of a cryptocurrency if all possible tokens were in circulation, including currently circulating tokens and those yet to be released, such as locked or reserved ones.
By calculating FDV, investors can assess the long-term value of a project, identify potential risks, and make informed decisions before investing. This article will explore how FDV works and its significance in the crypto industry.
What is fully diluted valuation (FDV)?
Fully diluted market cap or fully diluted valuation (FDV) is the overall value of a cryptocurrency project, considering all of its tokens in circulation. Investors use it to assess the project's future potential, similar to the total number of issuable shares in the stock market.
Why is fully diluted valuation (FDV) important?
When all coins are in circulation, the fully diluted valuation statistically represents the cryptocurrency project's highest value. This provides investors with a broader perspective of the project.
The total number of tokens circulating for most cryptocurrency projects may fluctuate weekly. As more tokens are created through mining, rewards for staking or providing liquidity, the release of vested tokens, or the minting of new tokens, the total number of tokens in circulation rises. As tokens are burned, the total number of deflationary tokens in circulation decreases.
It's now popular to release a tiny percentage of the token's maximum supply upon launch. Since there aren't many tokens in use, these projects are presumably “undervalued” in light of their current market capitalization and fundamentals.
If there isn't a corresponding rise in demand, the value of each token may begin to decline as more are released and put on the market. Investors who do not consider these potential fluctuations in supply could lose money when additional tokens are sold into the market. Analyzing a token's FDV prevents this situation.
How to calculate fully diluted valuation
The FDV considers the entire supply of tokens—not just the ones in circulation. A token's total supply can be found in the project's documentation or on Coingecko's tokenomics page. The smart contract details of tokens created on smart contract blockchains can also provide this information.
The fully diluted valuation of a cryptocurrency project is calculated by multiplying the token's entire supply by the token's current price.
Fully Diluted Valuation = Token Price X Total Supply
The total supply consists of both tokens currently in circulation and tokens awaiting distribution, except for any coins that have been burnt (removed from circulation), the total supply consists of both tokens that are currently in circulation and tokens that are awaiting distribution.
It is similar to the total number of shares outstanding on the stock market. The market capitalization of the cryptocurrency is projected using the fully diluted valuation, assuming that all tokens—aside from those burned in use—are present.
FDV vs. market cap
Fully diluted valuation and market cap (short for 'market capitalization') differ significantly.
A cryptocurrency's market cap is determined by the number of tokens in circulation and their current prices. Any changes in these factors can impact the market cap. Increased demand can drive up token prices and result in a higher market cap.
Let's examine the mathematical differences between FDV and market cap:
Token Price X Circulating Supply = Market Cap
Token Price x Total Supply = FDV.
When all its tokens are in circulation and can be traded on exchanges, a token's total supply equals its circulating supply. In this case, the FDV and market cap are the same value.
The FDV provides an indication of the anticipated future value. Most tokens in projects with tiny market capitalizations may be vested and slated for release soon. If these tokens had been released, the project's worth would have been as shown by the FDV statistics (ignoring the demand variable). As an investor, it is up to you to decide if the project is worth this estimated amount.
Conclusion
When used effectively, FDV is a useful statistic that helps investors assess how well a project performs in terms of tokenomics. Depending on the token release timetable, the time it takes for vested tokens to go into circulation could be many months. Those who intend to hold onto their assets for the duration should consider the impact this additional supply will have on the cost of each token.
As additional tokens get unlocked, there's a reasonable likelihood that the value per token will drop if the fully diluted valuation displays an irrational valuation. The FDV is probably more reasonable when the project has solid foundations and a sustainable token release schedule.
Cryptocurrency projects often provide information on their token's maximum and circulating supply, the distribution of circulating tokens, and upcoming release schedules. Each of these details is critical and influences the project's valuation.