Understanding FDV: How Fully Diluted Valuation Impacts Crypto Asset Prices
In the world of cryptocurrency, Fully Diluted Valuation (FDV) is a key metric that helps investors gauge a project’s potential value. As new tokens frequently hit the market, it is crucial to understand FDV and how it differs from market capitalisation.
This article explores the importance of FDV, its calculation, and why a solid fundamental analysis is essential for making informed investment choices in crypto.
What Is FDV, and Why Is It Important?
Fully Diluted Valuation (FDV) represents the potential maximum value of a cryptocurrency project, assuming all its tokens are in circulation. In recent years, it’s become common for startups to initially release only a tiny fraction of their total token supply. This limited circulation can create scarcity, driving up the token’s price early on, especially if the market is bullish, there’s significant hype around the project, or notable companies have made significant investments.
Investors who overlook the impact of future token supply increase the risk of potential losses. The fact that only 12.3% of tokens are currently in circulation indicates that a massive influx of new tokens will eventually enter the market. According to Binance Research, maintaining price stability in this scenario would require the demand to absorb around $80 billion in additional supply. An expert known as “Flow” noted that in the last six months, 80% of newly listed tokens on Binance have lost value compared to their trading price on the day of listing.
How Is FDV Calculated?
Fully Diluted Valuation (FDV) considers the total supply of a cryptocurrency, not just the tokens currently in circulation. To calculate FDV, you multiply the asset’s current price by its total (or maximum) supply. This supply figure includes tokens yet to be distributed through unlocks but excludes any coins permanently removed from circulation due to burns.
Let’s consider an example with an example cryptocurrency:
- As of August 20, 2024, the price of Coin A is $15.2. The total supply of Coin A is 500,000,000.
- To calculate the FDV: FDV = $15.2 * 500,000,000 = $7.6 billion
So, Coin A’s FDV is approximately $7.6 billion. Meanwhile, its market capitalisation might be lower if only a fraction of the total supply is circulated.
How Is FDV Different from Market Cap?
Market cap and fully diluted valuation (FDV) are related but distinct metrics in cryptocurrency.
- Market cap is calculated by multiplying the number of a project’s tokens currently in circulation by the price of one token. Thus, any increase in the price of a token directly impacts the market cap.
- On the other hand, FDV is determined by multiplying the token price by the total supply of coins, which includes both the tokens in circulation and those yet to be released into the market.
If all a project’s tokens are already in circulation, then the market cap and FDV will be equal. In some cases, projects with a small market cap may have a large number of tokens set to be released in the near future. In these situations, FDV and the token emission schedule become critical factors in predicting the asset’s future price.
Why Is Fundamental Analysis Essential?
The odds of making consistent profits from buying trendy tokens are slim, as many projects debut with already high valuations. Much of the potential profit has likely been captured by early investors. To navigate this landscape, investors must thoroughly analyse each project and craft personalised investment strategies that align with their risk tolerance.
Critical Considerations:
- Tokenomics: The timing of token unlocks and vesting periods directly influences the supply of tokens in the market. Without a corresponding boost in demand, an excess of selling pressure could drive prices down.
- Valuation Metrics: FDV alone doesn’t provide a complete picture. Evaluating ratios such as Market Cap/FDV and FDV/TVL is more effective, considering how these change over time.
- Product Evaluation: It is crucial to assess the stage of the product’s development and its alignment with market demands. Equally important is monitoring user engagement, address activity, and transaction volumes.
- Team and Community: The experience and contributions of the project’s founders, along with the level of community engagement, are key factors in evaluating its potential success.
What Solutions Exist to Address the High FDV Issue?
A Binance Research study on the impact of high FDV in many new tokens has sparked significant discussion within the crypto community. Key aspects of Binance’s updated approach include:
- Selecting small- and mid-cap projects across various sectors.
- Ensuring a moderate volume of tokens circulates during the Token Generation Event (TGE).
- Limiting the allocation to users not part of the project’s community.
- Focusing on projects demonstrating strong product-market fit, a sustainable business model, and a growing user base.
- Prioritising innovative startups that have a minimum viable product (MVP) and adhere to regulatory standards.
Additionally, Rob Hadik, General Partner at Dragonfly, suggested that projects should increase the percentage of liquid tokens at launch by adopting a “variable supply” approach. This strategy can promote healthier market dynamics and more effective pricing.
Conclusion
In conclusion, Fully Diluted Valuation (FDV) is a vital metric for understanding the actual potential value of a cryptocurrency project. By considering the total supply of tokens, FDV provides a clearer picture of a project’s market dynamics, especially when compared to traditional market capitalisation. However, investors must approach high FDV projects cautiously, considering factors like tokenomics, product development, and the project’s team.
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