Decoding FDV: The Importance of Fully Diluted Valuation in Crypto Investments

In a market where substantial portions of tokens are often locked up, understanding Fully Diluted Valuation (FDV) has become essential for investors looking to better evaluate the current value of cryptocurrency projects, as well as better predict the long-term value and risks associated with them.

Introduction to FDV

Fully Diluted Valuation (FDV) is an important metric in the cryptocurrency world, offering insights into the potential future value of a crypto project. FDV represents the total value of a cryptocurrency project if all of its tokens were in circulation. Since it is common for a substantial portion of tokens to be locked-up, this concept is crucial for investors looking to gauge the long-term potential and risk of their investments in various crypto projects.

Understanding FDV and Its Importance

FDV provides a snapshot of a cryptocurrency’s maximum potential market value, assuming every possible token is already circulating. This metric helps investors see beyond the current market situation and anticipate future developments. For example, if the current market cap of a new project is relatively small compared to the market caps of the largest crypto coins, but the FDV of the project is as big as the market cap of those top mature crypto coins, this may indicate that the project in question is currently overvalued.

There have been many instances where a hot new project achieves what looks like a respectable market cap, seeming to indicate a bright future. However, the new project has a very low circulating supply, as low as one or two percent of total supply, with an FDV larger than bitcoin’s!

Differences Between FDV and Market Cap

Market Cap is calculated by multiplying the current token price by the circulating supply of tokens.
Market Cap = Circulating Supply x Token Price

FDV takes into account the total supply of tokens, including those not in circulation.
FDV = Total Supply x Token Price

When all tokens are circulating, FDV and market cap will be the same. However, for many projects, the circulating supply is only a fraction of the total supply, making FDV a forward-looking metric compared to the market cap’s current snapshot. It also serves as a reality check on a project’s current valuation.

Why FDV is Preferred Over Market Cap

FDV has become a preferred metric for several reasons. It provides a more comprehensive view of a project’s potential value by considering all future tokens that will enter circulation, thereby future-proofing the valuation. Investors can better assess whether a project is undervalued or overvalued by comparing the current market cap to the FDV, leading to more informed investment decisions. Additionally, FDV aids in risk management by helping investors understand the impact of future token releases on the market. Projects with a high FDV compared to their current market cap might face significant price pressure as more tokens are released, and FDV helps telegraph and mitigate this risk.

The Impact of Token Supply Changes

The total supply of tokens can change due to various factors, which in turn affect the FDV and the perceived value and potential of a project. One such factor is the minting of new tokens, which increases the supply. This is often done as a reward mechanism for activities such as staking, mining, or participating in the project’s ecosystem, or to support new developments and expansions.

Another factor is token burning, where tokens are permanently removed from circulation, effectively reducing the supply. This can be part of a deflationary strategy to increase the scarcity and value of the remaining tokens. Both minting and burning tokens alter the total supply, thereby impacting the FDV.

The Dangers of Ignoring FDV

Overlooking FDV can lead to a misjudgment of a project’s true current value and its potential value in the future. One major risk is overvaluation. A project might appear undervalued when assessed solely on its current market capitalization. However, if it has a high FDV, the eventual release of new tokens could dilute the token’s price, leading to potential losses for investors who did not account for this future supply. This dilution happens because the increased number of tokens in circulation can reduce the value of each token unless there is a proportional increase in demand.

Another risk is a supply-demand mismatch. When new tokens are introduced into the market without a corresponding rise in demand, the token’s price may drop due to the oversupply. This can be particularly problematic in projects with aggressive token release schedules or those that fail to stimulate sufficient demand through their product development and marketing efforts.

Conclusion

For investors, get in the habit of looking at the FDV of every crypto project versus the current market cap. Understanding FDV and market cap should lead to a more balanced and realistic evaluation of any cryptocurrency project.

Have you ever been surprised to see the difference between a project’s current market cap and its FDV? Share your thoughts and opinions about this subject in the comments section below.