Trying to predict the future value of a cryptocurrency, especially a new token, can be difficult. When it comes to investing in cryptocurrency, metrics such as a fully diluted market cap can help you make the best decision.
Here’s an explanation of what a cryptocurrency’s fully diluted market cap is and why it matters.
What is fully diluted market cap in crypto?
When it comes to determining the overall risk and value of purchasing a cryptocurrency, the fully diluted market cap of a cryptocurrency is just one piece of the puzzle.
A fully diluted market cap, not to be confused with a market cap or circulating supply, is an estimate of what the market cap will be once all tokens in a project are in circulation. In other words, you are forecasting a cryptocurrency’s future market capitalization.
Fully diluted value (FDV) = Maximum supply of a tokens x Current market price
To determine a cryptocurrency’s fully diluted market cap, multiply the token’s individual value by the maximum supply of tokens.
For example, if a project has 100,000 tokens total and the token price is $5.00 per token,
the fully diluted market cap will be: 100,000 x 5 = $500,000.
Fully diluted market cap vs Market cap: how are they different?
The market cap of a cryptocurrency is calculated by multiplying the total number of circulating coins by the current value of one coin. When comparing the size of individual cryptos to alternatives or the market as a whole, the market cap is a useful metric.
Market Cap = Circulating Supply of a tokens x Current market price
A fully diluted market capitalization is defined as the total value of the cryptocurrency at today’s price if the entire future supply of coins were in circulation. As an example, consider bitcoin (BTC).
Take Bitcoin as an example, at the time of writing (28 July, 2022), the total number of bitcoins mined and thus in circulation was close to 19.1 million, while the maximum supply is 21 million.
The difference between the market cap and the fully diluted market cap for bitcoin is depicted below.
Market cap = 19.1 million x current price of 1 BTC
Fully diluted market cap = 21 million x current price of 1 BTC
In crypto, market cap and fully diluted market cap are frequently used to rank the relative popularity and importance of specific coins to the overall market, much like they are used to rank publicly traded companies.
The market cap and its fully diluted market cap should ideally be comparable in value.
A higher than normal fully diluted market cap indicates that there is a large amount of supply of the token scheduled to be released to the market, putting the token under a lot of selling or inflationary pressure. To ensure that there is no sudden massive inflationary pressure from an influx of new coins, tokens should have a hard cap or be locked.
Another common mistake that investors make is assuming that the company’s value is comparable to the token’s market cap.
It is critical to note that the market cap measures the network value of the token, not the value of the company. The token may last as long as there are users, but the company may not.
For example, consider Binance and its native token, BNB: while Binance may cease to exist next year, BNB’s DEX and Binance Smart Chain will continue to operate indefinitely as long as there are active nodes, and the network is maintained by developers.
Why should investors care about a fully diluted market cap?
While the fully diluted market cap can be useful when evaluating established cryptos, investors should consider multiple metrics when deciding which cryptocurrency to invest in.
The fully diluted market capitalization can be used to predict the impact of future supply on the market.
A new coin’s fully diluted value could be inflated simply by allowing for a large number of future coins. That is useful for many people who are concerned about the increasing supply of coins or tokens in the cryptocurrency industry.
Similarly, when a public company issues large amounts of new stock, this is unlikely to result in higher prices per unit but will increase inflationary pressure on the coin, causing the value per unit to fall. However, a fully diluted market cap is useful for examining the total value of a crypto asset itself over time.
Long-term investors may benefit from the fully diluted value market cap because it allows them to better judge whether a project’s value is reasonable. Because of the extremely high fully diluted market cap, there will be a lot more tokens in circulation.
As a result, when investors consider the fully diluted market cap, they should keep in mind that the metric does not account for the impact of inflation on the fully diluted market cap.
Consider bitcoin: while the supply has steadily increased to 18.8 million, the fully diluted market cap has increased significantly more in comparison to the increasing supply. This metric shows that investors believe bitcoin’s future value will rise rather than fall.
Limitations of fully diluted market cap
Determining a cryptocurrency’s fully diluted market cap can help you decide whether it’s a good investment or not. However, there are some factors that the fully diluted market cap does not take into account, such as:
- The project’s future developments
- Development team additions or departures
- A project’s marketability in the future
- Cryptocurrencies that compete
Aside from these factors, a fully diluted market cap does not account for the effect that an increase in token supply will most likely have on the individual token value.
Rather, if a token has a circulating supply of 50,000 and a token price of $5.00, it is assumed that the token price will remain $5.00 even after the maximum supply of 100,000 has been exhausted. However, this is not always the case.
All things considered, I believe that a fully diluted market cap cannot be used to determine whether a cryptocurrency project is a good investment or not. But it is just one of several other factors that influence the overall value of cryptocurrency.
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