- What is Fully Diluted Value (FDV)?
- The Importance of FDV for Crypto Investors
- Risks Associated with Using FDV in Crypto
FDV vs. Market Cap: What is the Difference?
When evaluating a crypto project, one often comes across metrics that provide an understanding of its overall potential value. One of these is the fully diluted value (FDV), which reflects the projected market capitalization, or market capitalization if all tokens, including those not yet in circulation, were available today.
FDV takes into account the total supply, while the circulating supply refers to the tokens actively being traded. Understanding FDV helps assess the overall value of the project, not just the number of tokens available on the market, thereby offering a more comprehensive understanding of the project’s estimated value.
Defining the Fully Diluted Value
In the crypto world, FDV is the total estimated value of a project if all of its tokens—both those currently available and those yet to be released—were sold on the open market. It is calculated by taking the current token price and multiplying it by the total supply, including tokens that are locked, reserved for the future, or not yet created.
The Importance of FDV for Crypto Investors
For investors, FDV is like considering the full cost of a product that is being bought and will be bought in the future. When a project has a high FDV, it indicates that more tokens may eventually enter circulation, which could lower the value of the tokens we currently hold. With a low market capitalization, this could make the project more affordable at the moment.
However, if the FDV exceeds the current market capitalization, it may indicate that the project could ultimately be overvalued. Understanding FDV allows for more informed decisions by providing a view of the total estimated value of your investments rather than just their current value.
FDV vs. Market Cap: What is the Difference?
FDV is the total potential value of a cryptocurrency if all tokens were in circulation. In contrast, market capitalization is the current value of a cryptocurrency based on the circulating supply and the price per token.
Let’s imagine a new cryptocurrency called A. There will be a total of 1 billion tokens A (total supply), and 500 million tokens A are currently available for trading (circulating supply).
FDV: If each token A is currently valued at $0.50, then the FDV would be $500 million. This represents the maximum potential value of A if all 1 billion tokens were in circulation and valued at $0.50 each.
Market Capitalization: If there are currently only 500 million tokens A in circulation and the price per token is $0.50, then the market capitalization would be $250 million.
The following formula is used to calculate FDV:
Using the example above, with a total supply of 1 billion tokens and a current price of $0.50 per token, the FDV would be:
FDV = 1 billion tokens * $0.50 / token = $500 millions
Market cap is calculated using the formula below:
Market cap = 500 million tokens * $0.50 per token = $250 million This value is based on what is available for trading right now. The impact of FDV and market capitalization on crypto projects can be significant, influencing how the market perceives the long-term value of the project. Let’s consider different scenarios for these two metrics: Low market capitalization, high FDV: The current valuation of the project is low, but it could be much higher if all its tokens were sold. This may indicate that it’s a hidden gem at the moment, but one should be cautious of potential dilution in value in the future. High market capitalization, low FDV: The project’s market value is high right now, but its future potential is lower than its current value. This could indicate that the project is overvalued or that its future growth is already priced in. Low market capitalization, low FDV: The current value of the project and its future potential are unfavorable. This could be a new or struggling project with little chance of success. High market capitalization, high FDV: The project has a high current value as well as a high potential future value. This usually means it is well-established and growing, but make sure that the high FDV doesn’t lead to dilution in the future. Which scenario is the most common? High market capitalization and high FDV are typical for well-established projects with solid growth potential. As of September 10, Bitcoin’s market capitalization is $1.135 trillion. With a maximum supply of 21 million coins for $57,502 each, its FDV is approximately $1.207 trillion. Relying on FDV when investing in cryptocurrency can be risky for several reasons. FDV provides a projection of the future value of a cryptocurrency by estimating its total potential value if all its tokens were in circulation. However, if other factors are not taken into account, this number can be misleading. Moreover, FDV does not consider the actual token release schedule. Many projects’ tokens are either transferred or locked over time. Therefore, if a significant portion of tokens is still unavailable, the project’s value might be better represented by its current market capitalization. The release of these tokens could lead to a decrease in their value, which may cause the token price to drop. Additionally, FDV assumes that the token price will remain constant, which is highly unlikely in the real world. If more tokens enter circulation, the increase in supply could drive the price down and impact the FDV calculation. Furthermore, FDV ignores factors that can influence the true value of a token, such as market competition, regulatory changes, and the ongoing development of the project. Overall, FDV is a useful metric, but not by itself. To make an informed investment decision, investors should consider other factors such as market capitalization, token release schedules, and the overall health of the project.
Risks Associated with Using FDV in Crypto
