Why you should pay attention to a token’s FDV
Hey folks, so over the last bull run, I made the mistake several times of getting into certain trending altcoins which were on a parabolic rise, but then hodling them until I got completely rekt. There are many tokenomic factors out there that can help you sleuth out whether or not gains for a particular token might be sustained. Whether it’s a huge upcoming token unlock or just a massive issuance rate can ultimately lead to a significant dilution event that can make your $100 dollar token turn into 10 cents.
Some of these factors might seem a bit elementary if you’ve been in the space for awhile, but if you’re new, then hopefully some of this information might help you avoid losing a ton of money, or at least it might help you know that you shouldn’t be holding something for the long term.
Today, the factor I’m going to be focusing on is FDV, or “Fully Diluted Value.” But before I go any further, in order to understand a token’s FDV and why it’s important, one must first understand your token’s market cap.
What is Market Cap?
Market cap is essentially the total value of all your tokens that are presently issued in existence. In the above example, currently the total market cap of Ethereum is approximately $145 billion dollars, meaning that there are $145 billion dollars worth of $ETH currently in existence today. If you were to try to figure out the number of $ETH tokens in existence, all we would need to do is to take the market cap and divide it by the current price of $ETH:
$145,024,510,228 / $1,185.09 = 122,374,257.68 $ETH tokens in existence
There are a number of reasons why it’s important to know a token’s market which I won’t go into today, but for today’s purposes, we need to know a token’s current market cap in order to assess how much we might be diluted in the future.
What is FDV?
Put simply, a token’s Fully Diluted Value is the theoretical future sum of a token’s total market cap if all tokens (present and future) were to be issued. Continuing to use $ETH as an example, you’ll see that the the current FDV of $ETH is approximately $145 billion dollars:
You’ll also notice that this amount matches $ETH’s market cap. This is to be expected because in the case of $ETH, Ethereum overall tends to be a deflationary (or at least a non-inflationary) asset:
With the Ethereum blockchain, assuming that activity/demand remains high, generally there will be more tokens being burned rather than issued which in turn decreases the overall token supply. This is generally considered to be very bullish news for $ETH holders because assuming that the market cap stays the same, if the number of tokens decreases then the price of $ETH should theoretically increase.
If we take a look at other tokens such as Bitcoin, you’ll notice that the total market cap of $BTC is about $322 billion dollars while the FDV is about $352 billion dollars — almost a $30 billion dollar difference:
The $30 billion dollar difference is attributed to the fact that there still $30 billion dollars worth of $BTC that are left to be mined. By 2140 (which is the date when they suspect the last of the bitcoin will be mined), Bitcoin’s market cap should match its FDV, for all $BTC will be issued into existence.
So those are the bluechips…what about smaller altcoins?
A general rule of thumb is that if there’s a significant difference between a token’s market cap versus its FDV, that essentially means that the token will get diluted heavily in the future. In other words, assuming that the token’s market cap stays the same, if you have an increasing number of tokens, then you will have a decrease in token price. Take $LOOKS for instance:
As you can see above, $LOOKS’ FDV is more than twice of its current market cap, meaning that there are still probably more than half of $LOOKS’ total token supply that haven’t been issued yet. And assuming that the total market cap remains the same, this means that each $LOOKS token will only be worth half of what it is now. Will this mean $LOOKS will definitely decrease in price? Maybe or maybe not, because as any trader will probably tell you…markets aren’t always rational.
If you’re curious about whether or not you may be getting dumped on by a future token unlock for your favorite altcoin, I highly suggest that you see if there’s an unlock coming up before you buy. The tool that I’ve found most useful is token.unlocks.app, which will tell you what’s coming up as well as a search function to see what they’re tracking:
If you notice on their site, they also outline the token’s FDV and spell out how much of the token has yet to be unlocked.
Conclusion
Just because there’s a huge release schedule for a given token, it doesn’t necessarily mean that there will be a permanent effect on price. Market prices are subject to a great deal of many factors, only one of them being FDV. In addition, it’s important to consider whether or not releases are already priced in. Arguably Ethereum’s Merge and Bitcoin’s halving cycles should already be priced in, but the token for both are currently continuing to drop.
If you take anything away from this article, I’m only suggesting that FDV be one of the many factors that you consider when analyzing tokenomics. If there is a significant disparity and you still want to ape in, it might make sense to focus on a shorter term play rather than a long hodl. In terms of market cap, if the token price doesn’t keep up with with the number of tokens being issued, then ultimately you might be one of the ones getting rekt.
Thanks for taking the time to read this and be sure to follow me on twitter (https://twitter.com/CryptosWith) to get all my latest updates.
Disclaimer: And as a final reminder, this is not financial advice and this is for educational and entertainment purposes only. Please as always, do your own research and find what investments are best for you. Cheers everyone!
