Concept Overview
Fully diluted valuation (FDV) illustrates the estimated market capitalization in case all tokens, including those not in circulation, were available today. It accounts for the overall supply, while the circulating supply accounts for the actively traded tokens.
Understanding FED aids in evaluating a project’s value in its entirety instead of just the quantity of tokens available on the market. Thus, it provides a more inclusive understanding of a project’s potential growth.
FDV Explained
It refers to a project’s overall approximated value in case all the tokens presently available and those still not released were sold on the open market. It is calculated by taking the present token price and multiplying it by the overall supply, including the locked tokens reserved for the future or yet to be generated.
There are various reasons for FDV’s relevance in crypto. Most crypto initiatives release their tokens slowly through staking, mining, or vesting.
For instance, Ripple executed a vesting schedule for XRP to align long-term interests, Bitcoin incentivizes miners to secure the network, and Tezos awards XTX staking for participating. While circulating supply illustrates the tokens presently available, FDV considers the overall supply that will finally exist.
This must offer a wider perspective of the future project’s potential. However, it is critical to consider that future token prices can change.
Importance of FDV for Crypto Investors
For investors, FDV is similar to considering the entire cost of an item being purchased on a payment plan. A project with a high FDV illustrates that more tokens might finally enter circulation, reducing the value of the tokens a person owns.
A low market cap means the project boosts the project’s affordability. In case the FDV surpasses the present market cap, it illustrates that the project might finally be overvalued.
Understanding FDV enables one to make better decisions by permitting them to see their investment’s total perspective value instead of the present value.
Difference Between FDV and Market Cap
FDV is a crypto’s total potential value if all tokens are circulating. Market cap is a crypto’s present value on the circulating supply and price per token.
One can imagine a new currency called ABC. 10 billion ABC tokens will ever exist (the total supply), and 5 Billion ABC tokens are presently available for trading (the circulating supply).
A breakdown of this coin is shown below:
FDV: If every token’s current value is $0.50, the DDV would be $5B. This illustrates ABC’s maximum potential value in case all the 10 billion tokens were circulating and valued at $0.50 each.
Market cap: If only 5 billion ABC tokens are circulating, and the price for every token is $0.50, the market cap would be $2.5B.
Calculating FDV in Crypto
Using the previous example, the FDV would be:
FDV = 10 billion tokens * $0.50/token = $5 Billion
The effect of FDV and market capitalization numbers on crypto projects can be significant. This can impact how the market perceives a project’s long-term growth.
Examples of scenarios are explained below:
High market cap, low FDV: The project’s market value is currently high, but the future potential is lower compared to its present value. This may illustrate that the project is overvalued or priced in for future growth.
Low market cap and FDV: The present value and future are unfavorable. It may indicate a new or struggling project with minimal chances of survival.
High market cap, high FDV: The project has a robust current and potential future value. This indicates it is properly established and growing, but one must ensure the high FDV does not result in future dilution.
Risks of Depending on FDV in Crypto
FDV offers a projection of a crypto’s future value by approximating its total potential value if all its tokens were circulating. Nevertheless, the number can be deceptive if other factors are not considered.
FDV does not consider the actual token release schedule. Most projects’ tokens are vested or locked up over time. Hence, in case a considerable portion of the tokens are unavailable, the present market cap might better represent the project’s value.
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