Explained: Fully diluted market cap and what it says about the future value of a cryptocurrency

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By CNBCTV18.com Oct 14, 2022, 06:47 PM IST (Published)

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Fully diluted market cap — also known as fully diluted valuation (FDV) – refers to the market cap of a project once all its tokens have been released into circulation. It is basically an estimation of a project’s future market capitalisation. If a cryptocurrency has an unlimited supply, or it has reached its maximum supply, the FDV will be equal to its market cap.

Anyone who has dabbled with cryptocurrency has probably heard of the term ‘market capitalisation.’ The market cap of a project refers to the total value of its coins currently in circulation. For instance, Bitcoin currently has a market cap of roughly $375 billion. Market capitalisation helps the community ascertain the current size of the project.

But what if we are trying to ascertain the future success of a crypto project? In that case, one simple indicator that could be helpful is a fully diluted market cap. While FDV isn’t a very commonly used metric amongst analysts, it can provide some valuable insights into the future of a cryptocurrency. So, tag along as we explain what a fully diluted market cap is and how it can be helpful to investors.

What is a fully diluted market cap?

Fully diluted market cap — also known as fully diluted valuation (FDV) – refers to the market cap of a project once all its tokens have been released into circulation. It is basically an estimation of a project’s future market capitalisation. If a cryptocurrency has an unlimited supply, or it has reached its maximum supply, the FDV will be equal to its market cap.

How is a fully diluted market cap calculated?

Calculating the fully diluted market cap of a crypto project is pretty simple. All you have to do is multiply the maximum supply of a cryptocurrency by its current market value. The resulting figure is the fully diluted market cap of that particular coin or token.

For instance, the current market value of Bitcoin is $19,689.67, and its maximum supply is 21,000,000 coins. Therefore, Bitcoin’s FDV is around $413 billion. This would be Bitcoin’s market cap once all its 21 million coins are released into circulation.

What can we tell from the fully diluted market cap?

It is important to note that a fully diluted market cap does not predict future prices. It just gives us an estimate of a cryptocurrency’s future market cap. If we wish to draw inferences from FDV, we must compare it with the market cap of that particular cryptocurrency.

Ideally, the difference between a project’s market cap and its FDV should be pretty low. A significant difference can be a warning sign that a coin’s current value is overinflated. A general rule is that if the FDV is more than ten times a token’s current market cap, it could be associated with two problems.

Firstly, it could point to inflationary tokenomics. A high FDV indicates that current buyers are paying a lot for the current, limited number of coins. However, if more coins flood the market, supply will increase, which will drive down a coin’s value unless it’s in high demand. A high FDV can also lead to increased selling pressure. If the FDV metric becomes popular, investors will see a higher FDV as a negative sign and assume the token is overvalued. This often encourages owners to sell their tokens, resulting in price drops.

Conclusion

Every bit of information is essential when planning your crypto investments. If there are more signs pointing to a price increase or decrease, the chances of that prediction being true are increased. However, the crypto market is highly volatile, and even the strongest indicators can sometimes turn out to be false. Therefore, you should only invest as much as you are comfortable losing entirely.

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