Fully Diluted Valuation (FDV) in Crypto Explained

Fully Diluted Valuation (FDV) in Crypto Explained

Imagine you're buying shares in a new company. You want to know how much the entire company is worth, not just the shares currently available for purchase. Fully Diluted Valuation (FDV) is the crypto equivalent. It tells you the total potential value of a cryptocurrency project, considering all the tokens that could ever exist, not just the ones currently available. It’s a key metric for understanding a project's potential and risk.

Key Takeaway: FDV reveals the maximum potential market capitalization of a cryptocurrency project, providing a more comprehensive view of its value compared to its current market capitalization.

Definition

Fully Diluted Valuation (FDV) is the total market value of a cryptocurrency project, calculated by multiplying the current token price by the total supply of tokens, including those not yet in circulation.

In simple terms, FDV answers the question: “If every single token of this cryptocurrency was available and being traded at today’s price, what would the total market value be?” It's a forward-looking metric, offering a glimpse into a project's maximum potential valuation.

Mechanics: How FDV is Calculated

Calculating FDV is straightforward. It involves a simple formula:

• FDV = Current Token Price x Total Supply

Let’s break it down with an example.

1. Find the Current Token Price: Let's say a token, “TokenX,” is currently trading at $1.50 per token.
2. Determine the Total Supply: “TokenX” has a total supply of 100 million tokens.
3. Calculate FDV: $1.50 (Token Price) x 100,000,000 (Total Supply) = $150,000,000.

Therefore, TokenX has an FDV of $150 million. This means that if all 100 million tokens were circulating and trading at $1.50 each, the project would have a market capitalization of $150 million.

This is different from Market Capitalization (Market Cap), which is calculated as:

• Market Cap = Current Token Price x Circulating Supply

Market Cap only considers the tokens already available for trading. Using the same TokenX example, if only 50 million tokens are currently circulating, the market cap would be $1.50 (Token Price) x 50,000,000 (Circulating Supply) = $75,000,000.

This difference highlights a crucial point: FDV provides a more complete picture of the potential value, while Market Cap reflects the current valuation.

Trading Relevance: Why FDV Matters

Understanding FDV is critical for making informed investment decisions. It helps traders and investors assess a project's potential for growth and identify potential risks.

Assessing Growth Potential

A high FDV relative to the Market Cap can indicate significant future growth potential. If a project has a low market cap and a high FDV, it suggests that there is a significant amount of tokens yet to be released. If the project executes its roadmap successfully and the tokens are released, the market cap could increase significantly. However, this also carries the risk of dilution, which we will cover later.

Identifying Potential Risks

FDV can also highlight potential risks, particularly dilution. Dilution occurs when new tokens are released into the market, increasing the total supply. This can decrease the price per token if demand doesn’t keep pace with the increased supply. A high FDV suggests that a substantial number of tokens may be released in the future. If a large portion of the total supply is still locked up (held by the team, for staking rewards, etc.), the circulating supply will increase over time. This can dilute the value of the existing tokens, potentially leading to price decreases if the market isn't ready for the influx.

Comparative Analysis

FDV is also useful for comparing different cryptocurrency projects. By comparing the FDV of different projects, you can get a sense of their relative valuations and potential for growth. However, this must be done in conjunction with other metrics, such as circulating supply, trading volume, team, technology, and market conditions.

Risks Associated with FDV

While FDV offers valuable insights, it’s essential to be aware of the associated risks:

Dilution Risk

As mentioned earlier, a high FDV implies a greater potential for dilution. If a project releases a large number of tokens, it could negatively impact the price of existing tokens. This is especially true if there's not enough demand to absorb the new supply. Investors should carefully examine the tokenomics of a project, paying close attention to the token release schedule (vesting schedule), to understand when and how many new tokens might enter circulation. This helps to gauge the potential dilution risk.

Overvaluation

FDV can sometimes be misleading. A very high FDV might suggest that a project is overvalued, especially if it's based on an inflated token price. It’s crucial to analyze the project's fundamentals, including its technology, team, and market adoption, to determine if the valuation is justified.

Market Sentiment

Market sentiment and overall market conditions heavily influence the price of a cryptocurrency. Even if a project has a solid FDV and strong fundamentals, external factors can impact its price. A bear market can negatively affect all cryptocurrencies, regardless of their FDV. Conversely, a bull market can inflate prices, making FDV less representative of a project’s true value.

Total Supply Accuracy

The accuracy of FDV depends on the accuracy of the total supply data. Sometimes, projects might change their total supply (e.g., through token burns or unexpected minting). Always verify the total supply information from reliable sources (e.g., CoinMarketCap, CoinGecko, the project's official website) to ensure an accurate FDV calculation.

History/Examples

Early Bitcoin

In the early days of Bitcoin (2009-2010), the concept of FDV wasn't as widely discussed. Bitcoin's total supply was known from the beginning (21 million coins). However, the market cap was small because of the limited circulating supply and low token price. As the price increased and more coins entered circulation, both the market cap and the FDV grew accordingly. Bitcoin’s FDV is now roughly the same as its market cap, because almost all bitcoins have been mined and are in circulation.

Initial Coin Offerings (ICOs)

During the ICO boom of 2017-2018, FDV became a more prominent metric. Many new projects launched with ambitious plans and large total supplies. Investors began using FDV to evaluate the potential of these projects. However, many projects with high FDVs and unproven concepts ultimately failed, highlighting the importance of looking beyond FDV and considering the project's fundamentals.

Recent Examples

• Ethereum (ETH): Ethereum’s FDV is currently significantly higher than its market cap, reflecting the large total supply of ETH. This is due to the nature of ETH's tokenomics.
• Solana (SOL): Solana has a significant FDV, reflecting its large total supply and future token releases, with a significant portion of tokens allocated to the team and foundation. Investors watch this closely, as the circulating supply continues to grow.

Comparing Projects

Consider two hypothetical projects:

• Project A: Current Price: $1.00, Circulating Supply: 100 million, Total Supply: 1 billion. Market Cap: $100 million, FDV: $1 billion.
• Project B: Current Price: $10.00, Circulating Supply: 5 million, Total Supply: 10 million. Market Cap: $50 million, FDV: $100 million.

While Project A has a higher FDV, Project B has a lower FDV relative to its market cap. This can mean Project B is less prone to significant dilution, but a more thorough analysis is still required before investing in either project.

Conclusion

FDV is a valuable tool for assessing the total potential value of a cryptocurrency project. By understanding the concept of FDV, its calculation, and its implications, investors can make more informed decisions. However, it’s crucial to use FDV in conjunction with other metrics and to conduct thorough research into a project's fundamentals, tokenomics, and market conditions. This holistic approach will provide a more comprehensive understanding of a project's potential and risk profile, ultimately leading to more successful investment outcomes.