Understanding Fully Diluted Valuation (FDV) in Cryptocurrencies

Fully Diluted Valuation (FDV) is a crucial metric widely employed when assessing cryptocurrency projects, offering a comprehensive view of a project's total potential value. FDV represents the estimated market capitalization if all tokens – including those not yet in circulation – were available on the market at present.

Unlike circulating supply, which only refers to the number of tokens being traded, FDV takes into account the total token supply. Grasping FDV allows for a holistic evaluation of a project's worth, rather than simply basing it on the number of tokens currently on the market, thus providing a more in-depth insight into the project's potential.

This article will elucidate what fully diluted valuation means in the cryptocurrency market, the steps to calculate FDV, its significance, and the risks associated with relying on this indicator in the crypto sector.

Fully Diluted Valuation (FDV) Explained

Think of FDV as buying a house that's still under construction. You can only see part of the house now, but you know more rooms will be built in the future. In the crypto world, FDV represents the estimated total value of a project if all tokens – both existing and unissued – were sold on the market. FDV is calculated by multiplying the current token price by the total supply, including tokens that are locked, reserved for the future, or haven't been created yet.

Why is understanding FDV important when investing in cryptocurrencies? There are several reasons why FDV matters in this field.

Many cryptocurrency projects release their tokens gradually through mechanisms such as vesting, staking, or mining. For instance, Gate has implemented a vesting system for its native token that aligns long-term benefits, while other platforms reward token staking for network participation or incentivize miners to secure the network.

Thus, while the circulating supply only reflects the number of tokens currently available, FDV looks at the total supply that will appear in the future.

This gives you a broader view of the project's future potential, but it's worth noting that future token prices may fluctuate.

Total Supply Maximum Supply Circulating Supply Meaning Total number of tokens issued, including non-issued tokens Absolute limit of total tokens that can exist Number of tokens currently available for trading Includes locked, burned, and reserved tokens Fixed limits set by protocol; unchangeable Excludes locked, burned, and reserved tokens Changes over time Can change with new issuance or token burning Remains the same; predetermined by protocol Can fluctuate due to new issuance, burning, or token locking Impact of locking/burning Locked tokens reduce available supply; Burned tokens reduce total supply No impact; reflects maximum cap Adjusted for locked and burned tokens; changes as these tokens are released or rejected

Why FDV is Important for Cryptocurrency Investors

For investors, FDV is akin to looking at the total cost of an item you're buying in installments. When a project has a high FDV, it indicates that more tokens will be put into circulation in the future, potentially reducing the value of the tokens you currently hold. With a low market cap, this can make the project appear "cheaper" for now.

However, if FDV significantly exceeds the current market cap, it could indicate that the project might be overvalued. Understanding FDV helps you make better investment decisions by allowing you to see the full potential value of an investment rather than relying solely on its current value.

Too much financial jargon? Let's simplify:

• FDV is the potential overall value.

• Market cap is the current value.

Next, we'll explore the difference between FDV and market cap through an example in the following section.

FDV and Market Cap: What's the Difference?

FDV and market cap may sound like similar terms, but as mentioned above, they are different concepts.

FDV is the potential overall value of a cryptocurrency if all tokens were in circulation. In contrast, market cap is the current value of a cryptocurrency based on its circulating supply and price per token.

Imagine a new cryptocurrency called XYZ. In total, there will be 1 billion XYZ tokens (total supply), and currently, 500 million XYZ tokens will be traded (circulating supply). Let's now analyze the coin's FDV and market cap:

• FDV: If each XYZ token is currently worth $0.5, then the FDV would be $500 million. This number represents the maximum potential value of XYZ if all billion tokens were in circulation and valued at $0.5 each.

• Market Cap: If there were only 500 million XYZ tokens currently in circulation and the price per token was $0.5, then the market cap would be $250 million.

How are these figures calculated? Let's see how FDV and market cap are computed.

How is FDV in Cryptocurrency Calculated?

The following formula is used to calculate FDV:

FDV = Total Supply × Current Price per Token

Where:

• Total Supply: This is the total number of tokens that have been or will be issued by a cryptocurrency project. The total supply includes both tokens already in circulation on the market and tokens not yet released (locked, reserved for the future, or in the process of being released).

• Current Price per Token: This is the current market value of each token at the time of calculation. This price can fluctuate over time based on supply and demand in the market.

Using the example above, with a total supply of 1 billion tokens and a current price of $0.5 per token, the FDV would be:

FDV = 1 billion tokens x $0.5 = $500 million

Market cap is calculated using the formula below:

Market Cap = Circulating Supply × Current Price of Each Token

For example, if the circulating supply is 500 million tokens and the current price of each token is $0.50, then the market cap would be:

Market Cap = 500 million tokens × $0.5 = $250 million

This is the value based on the number of tokens currently available for trading in the market!

The influence of FDV and market cap on cryptocurrency projects can be significant, affecting how the market evaluates the project's long-term potential. Let's now look at some scenarios to better understand their impact:

• Low Market Cap, High FDV: The project's current value is low but could be much higher if all tokens are sold. This may indicate that the current project is a "hidden gem," but caution should be exercised regarding the possibility of future value dilution.

• High Market Cap, Low FDV: The project's current value is high, but the future potential is lower than the current value. This could imply that the project is overpriced or has already fully accounted for future growth.

• Low Market Cap, Low FDV: The project's current value and future potential are not positive. This could be a new or struggling project with little chance of success.

• High Market Cap, High FDV: The project has a strong current value and high future potential. This generally indicates that the project is established and progressing well, but it's necessary to ensure that a high FDV doesn't lead to future value dilution.

So, which scenario is most common? A high market cap and high FDV often appear in established projects with strong growth potential. As of September 10, the market cap of Bitcoin was $1.135 trillion. With a maximum total supply of 21 million coins and a price per coin of $57,502, Bitcoin's FDV is approximately $1.207 trillion.

In contrast, NEXO, ranked 100 by CoinMarketCap as of September 10, has a market cap of about $558.3 million and an FDV of about $997.3 million, with 560 million NEXO tokens in total circulation.

The question now is whether FDV is a reliable measure of a cryptocurrency's true value. Let's find out.

Risks of Relying on FDV in Cryptocurrency Investment

Relying on FDV for cryptocurrency investment can be risky for several reasons. FDV provides a forecast of a cryptocurrency's future value by estimating its total potential value if all its tokens were in circulation. However, if other factors are not considered, this figure can be misleading.

Moreover, the actual timeline of token issuance is not accounted for by FDV. Many projects involve tokens being issued gradually or locked for a certain period. Thus, if the majority of tokens have not been issued, the project's value may be more accurately reflected by the current market cap. The issuance of additional tokens can reduce their value, leading to a decrease in token price.

Furthermore, FDV assumes that the token price will remain the same, which is unlikely in reality. If there are more tokens in circulation, an increase in supply could lead to a decrease in token price and affect the FDV calculation. Additionally, FDV does not take into account factors that can affect the actual value of the token, such as market competition, legal changes, and ongoing project development.

Therefore, FDV is a useful indicator, but it cannot be used alone. To make a comprehensive investment decision, investors must consider other factors such as market cap, token issuance timeline, and the overall health of the project.