Key takeaways

FDV estimates the total value if all tokens were in circulation, while market cap reflects the present value based on currently circulating tokens.

FDV helps investors understand the maximum potential value of a project and assess future growth potential.

A high FDV might signal future potential but also risks of value dilution. A low FDV compared to its market cap could mean overvaluation.

FDV doesn’t consider future token releases or market changes, so it’s important to use other metrics alongside it.

When assessing a crypto project, you’ll often encounter metrics that give insights into its total potential value. One of these is fully diluted valuation (FDV), which shows the estimated market capitalization, or market cap, if all tokens — including those that haven’t been put into circulation yet — were available today.

FDV accounts for the total supply, whereas the circulating supply refers to actively traded tokens. Understanding FDV helps assess a project’s value in its entirety rather than just the quantity of tokens available on the market, thus offering a more comprehensive understanding of a project’s prospective worth.

This article explains what fully diluted market cap means in crypto and discusses fully diluted valuation calculation steps, FDV’s importance, and the risks of relying on FDV in crypto.

Fully diluted valuation (FDV) explained

Think of FDV as buying a house that’s still under construction. You can only see part of it right now, but you know more rooms are being added. In the cryptocurrency world, FDV is the total estimated value of a project if all of its tokens — currently available and those still not released — were sold on the open market. It’s calculated by taking the current token price and multiplying it by the total supply, including tokens that are locked, reserved for the future or yet to be created.

But why is it important to understand FDV in crypto investing? There are several reasons why FDV matters in crypto.

You might have heard that many crypto projects release their tokens gradually via vesting, staking or mining. For example, Ripple implemented a vesting schedule for XRP to align long-term interests, Tezos rewards XTZ staking for network participation, and Bitcoin incentivizes miners to secure the network.

So, while circulating supply reflects the tokens currently available, FDV considers the total supply that will eventually exist.

This should give you a broader view of the future project’s potential, but it’s important to remember that future token prices can fluctuate.

Did you know? Crypto tokens typically enter circulation through vesting, where tokens are gradually unlocked; staking, where tokens are earned as rewards; or mining, where tokens are generated through computational efforts. Each method impacts supply differently!

Why FDV matters for crypto investors

For investors, FDV is like considering the entire cost of an item you’re purchasing on a payment plan. When a project has a high FDV, it indicates that more tokens may eventually enter circulation, which could reduce the value of the tokens you currently own. With a low market cap, this could make the project appear more affordable today.

However, if the FDV exceeds the current market capitalization, it may indicate that the project may ultimately be overvalued. Understanding FDV enables you to make better decisions by allowing you to see your investment’s total prospective value rather than its current value.

Too much financial jargon? Let’s simplify it:

FDV is the potential total value.

Market cap is the current value.

Now, let’s explore the difference between FDV and market cap with an example in the next section.

FDV vs. market cap: What’s the difference?

FDV and market cap may sound like similar terms. But, as outlined above, they are different concepts.

FDV is the total potential value of a cryptocurrency if all tokens were in circulation. In contrast, the market cap is the current value of a cryptocurrency based on the circulating supply and price per token.

Imagine a new cryptocurrency called XYZ. A total of 1 billion XYZ tokens will ever exist (the total supply), and 500 million XYZ tokens are currently available for trading (the circulating supply). Now, let’s break down the FDV and market cap of this coin:

FDV: If each XYZ token is currently valued at $0.50, then the FDV would be $500 million. This represents the maximum potential value of XYZ if all 1 billion tokens were in circulation and valued at $0.50 each.

Market cap: If only 500 million XYZ tokens are currently circulating, and the price per token is $0.50, then the market cap would be $250 million.

How are these numbers arrived at? Let’s look at how FDV and market cap are calculated.

Did you know? FDV is similar to fully diluted shares outstanding in the stock market. If all convertible securities, options and warrants were exercised, the total number of shares that would be issued is represented by this metric. It is frequently used to determine a business’s fully diluted earningss per share (EPS), which offers a more thorough overview of the profitability of the company.

How is FDV calculated in crypto?

The following formula is used to calculate FDV:

Using the example above, with a total supply of 1 billion tokens and a current price of $0.50 per token, the FDV would be:

FDV = 1 billion tokens * $0.50/token = $500 million

Market cap is calculated using the below formula:

In this example, if the circulating supply is 500 million tokens and the current price per token is $0.50, the market cap would be:

Market cap = 500 million tokens * $0.50/token = $250 million.

That’s the value based on what’s actually available right now for trading!

The impact of FDV and market cap numbers on crypto projects can be substantial, affecting how the market perceives a project’s long-term worth. Now, let’s dive into some scenarios to understand their implications:

Low market cap, high FDV: The project’s present valuation is low but might be much higher if all of its tokens were sold. This may indicate that it is a hidden gem for the time being, but beware of possible value dilution down the road.

High market cap, low FDV: The project’s market value is high right now, but its future potential is lower than its current value. This might suggest that the project is overvalued or already priced in for future growth.

Low market cap, low FDV: The project’s current value and future potential are not favorable. It could be a new or a struggling project with little chance of success.

High market cap, high FDV: The project has a strong current value and also a high potential future value. This usually means it’s well-established and growing, but make sure the high FDV doesn’t lead to future dilution.

So, which scenario is most common? A high market cap and high FDV are typical for established projects with solid growth potential. As of Sept. 10, Bitcoin’s market cap is $1.135 trillion. With a maximum supply of 21 million coins priced at $57,502 each, its FDV is approximately $1.207 trillion.

On the other hand, NEXO, ranked 100th by CoinMarketCap as of Sept. 10, has a market cap of roughly $558.3 million and an FDV of around $997.3 million, with 560 million NEXO tokens in circulation out of a total supply of 1 billion.

Now, the question arises whether FDV is a reliable measure of a cryptocurrency’s true value. Let’s find out.

Did you know? If the maximum supply of a cryptocurrency is known, it’s used in the FDV calculation to estimate the total potential value if all tokens were in circulation.

Risks of relying on FDV in crypto

Relying on FDV in crypto investing can be risky for several reasons. FDV provides a projection of a cryptocurrency’s future value by estimating its total potential value if all of its tokens were in circulation. However, if other factors aren’t taken into account, this number could be misleading.

Moreover, the actual token release schedule is not considered by FDV. Many projects’ tokens are either vested or locked up over time. Therefore, if a significant portion of the tokens aren’t yet available, the project’s value may be better represented by the current market capitalization. The issuance of these tokens may cause their value to diminish, which could result in a decline in the price of the token.

Plus, FDV assumes that the token’s price will stay constant, which is highly unlikely in the real world. If more tokens are in circulation, the increased supply could cause a price decline and impact the FDV calculation. Furthermore, FDV ignores factors that could affect the token’s true worth, such as market rivalry, legislative changes and the project’s continuing development.

So, FDV is a useful metric — but not on its own. For a well-rounded investment decision, investors should consider other factors such as market cap, token release schedules and overall project health.

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