What is a Fully Diluted Valuation? How to use FDV in your investments?
A fully diluted valuation (FDV) is an important metric investors use to value crypto projects and make informed investment decisions. As cryptocurrencies continue to gain mainstream adoption, understanding concepts like FDV becomes pivotal, especially for long-term investors. In this comprehensive guide, we will demystify FDV, how it works, why it matters, and how you can use it to your advantage when analyzing crypto investments.
What is a Fully Diluted Valuation?
Fully diluted valuation refers to the total value of a crypto asset when all tokens or coins that can possibly enter circulation are taken into account. This includes coins/tokens that are locked, reserved, or yet to be mined or minted.
For instance, if a project has issued 10 million coins out of a maximum supply of 100 million, the fully diluted valuation considers the value of all 100 million coins rather than just the 10 million in circulation.
The formula is:
FDV = Current Market Cap x (Max Supply / Current Supply)
Or
FDV = Price per token x Max Supply
Why Does FDV Matter for Cryptocurrencies?
FDV gives a more accurate representation of a project’s true valuation than just looking at market capitalization. It provides insights into the potential growth and overall health when considering things like token unlock schedules, reserves, burning mechanisms, etc.
Some of the key reasons why FDV is important are:
1. Helps compare valuation across projects: Market cap alone can be misleading for comparison if the circulating supply is very different between assets. FDV creates a level field.
2. Indicates potential growth: A high FDV shows a project has room to grow as more tokens enter circulation. The gap between FDV and market cap can signal undervaluation.
3. Accounts for inflatory effects: Max supply factors in future minting or mining of coins that can devalue existing coins. FDV gives a more realistic picture of accounting for this inflation.
4. Critical for long-term investors: FDV gives a better sense of future valuation which is vital for long-term investors versus short-term speculators. The long view provided by FDV helps make better-informed decisions.
5. Assesses launch or presales: FDV helps analyze if a project launch or presale is under or overvalued compared to FDV at launch. This helps determine investing strategy.
How To Calculate Fully Diluted Valuation
The steps to calculate FDV are:
1. Identify key metrics:
- Current market cap — Value based on price x circulating supply
- Max supply — Total number of coins that will ever exist
- Current circulating supply
2. Use the formula:
FDV = Current Market Cap x (Max Supply / Current Supply)
3. Find data points:
- Check crypto data sites like Coinmarketcap for current market cap, price, and circulating supply
- Whitepaper, project docs, or blockchain explorer will have max supply details
4. Plug the data into the formula and calculate FDV!
Let’s take an example:
Coin XYZ
Price: $2
Circulating supply: 25 million
Max supply: 100 million
FDV = Current Market Cap x (Max Supply / Current Supply)
Market cap = Price x Circulating supply
= $2 x 25 million = $50 million
Max Supply = 100 million
Current Supply = 25 million
FDV = $50 million x (100 million / 25 million) = $200 million
So the FDV for Coin XYZ is $200 million. This is much higher than just its market cap of $50 million!
How To Use FDV For Crypto Investment Analysis
Now that you know how to calculate FDV, how do you use it to make better crypto investments?
Here are some tips:
- Gauge under/overvaluation: Compare FDV and market cap. If FDV >>> market cap, it may be undervalued. The opposite is if FDV << market cap.
- Evaluate potential growth: A high FDV shows room to expand as more tokens enter circulation. Is there a lot of upside?
- Estimate future valuation: Will the FDV represent fair value in the future as the project matures? How does it compare to valuations of similar projects?
- Assess supply effects: Consider circulating supply changes over time. Are there lockups expiring? Will mining/minting increase or decrease future supply?
- Review burn mechanisms: Factoring in burning helps estimate future supply reduction which can increase FDV valuation.
- Analyze launch/presales: Use FDV to determine if the launch or presale price seems fair. Also, compare FDV at launch to the current valuation.
- Track dilution: Look at historical dilution by comparing FDV at launch to current FDV. Useful to gauge inflationary effects.
- Confirm with other metrics: Use FDV analysis with other metrics like P/E ratios, transaction volume, GitHub activity, etc. to make decisions.
FDV is a very useful addition to the toolbox of any crypto investor looking to build long-term value. While not a perfect measure, integrating diluted valuation analysis into research processes can help surface key insights and attractively valued opportunities. Like any metric, FDV should be considered as part of a holistic assessment of a project’s fundamentals, community traction, and growth roadmap.
Combining diluted valuation with an investor’s own analysis of qualitative factors can ultimately enhance overall crypto investing skills and success. As with any investment, a prudent strategy is imperative to navigate the volatility and cycles of this exciting new asset class. By learning how to wield tools like fully diluted valuation, crypto enthusiasts can become savvier in pursuing their goals. While risks remain, those who learn how to analyze projects strategically have an advantage in the burgeoning crypto space.
