There are a number of metrics that are used by crypto investors to understand tokenomics of a blockchain. These metrics include Trading Volume, Circulating Supply, Maximum Supply, Market Cap, etc. Another metric that is considered these days is Fully Diluted Valuation (FDV).
FDV can simply be defined as the Market Cap of the project once the maximum number of tokens have been issued by the development team. In other words, it is a method of computing the future market cap of a project.
All the cryptocurrency prices and market capitalization tools like Coingecko, Coinmarketcap shows the fully diluted valuation of a coin.
For example, in the below screenshot you could see the FDV of Filecoin:
FDV can be computed as follows:
FDV = Maximum supply of a token X Current market price of the token
In other words, FDV represents the future market cap of a project once all possible tokens have been issued provided the price of the token remains the same as of today.
How FDV is different from Market Cap?
Market Cap can be termed as the current market value of a blockchain project. This can be computed by multiplying the current price of the token with its circulating supply in the market.
Hence, Market Cap can be calculated as follows:
Market Cap = Circulating supply of a token X Current market price of the token
For Example: Let us consider ADA (the in-house token of the Cardano blockchain) for computation of its Market Cap and Fully Diluted Value (FDV).
- Current Market Price = USD 1 (the figure has been rounded off for the purpose of simplicity)
- Circulating Supply = 31,948,309,441
- Maximum Supply = 45,000,000,000
Market Cap = 31,948,309,441 X USD 1 = USD 31,948,309,441
Fully Diluted Value (FDV) = 45,000,000,000 X USD 1 = USD 45,000,000,000
For more clarity, you may refer to the following table.
|Name of the Project||Token Name||Current Price||Circulating Supply||Maximum Supply||Market Cap||Fully Diluted Value (FDV)||Market Cap to FDV|
|A||B||C||D = A X B||E = A X C||F = D / E|
How reliable FDV is as a valuation parameter?
The basic problem with FDV is that it ignores the possible decrease in the price of a token with the eventual increase in its circulating supply.
This can be understood with the following example:
Suppose there is a token (let us call it ABC) that is valued at USD 100 and the circulating supply is 2 tokens with a maximum supply of 4 tokens.
Market Cap of ABC = 2 Tokens X USD 100 = USD 200
However, FDV will be as follows:
FDV (Future Market Cap) = 4 Tokens X USD 100 = USD 400
Therefore, FDV assumes that additional supply of the concerned token will not affect its price in the market and thus the market cap in the future will increase proportionally to the circulating supply at any given time.
Further, there are many other factors that are ignored by FDV while computing the future market cap of a project which may increase or decrease the value of the platform significantly, such as:
- Future developments in the project
- Additions or departures from the core development team
- Future market relevance of the project
- Developments made by the competitors in their respective projects
Therefore, in my understanding, FDV can not be considered a very reliable metric to evaluate a crypto project.
In the coming days I will share more factors that you should consider before you invest in a token. By mixing the FDV and Tokenomics of a coin/token will help you pick a winner.
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