When valuing a cryptocurrency or any project, investors use two components – Market Cap and Fully Diluted Market Cap.
Both metrics are minimally similar, but have two different meanings. Today we will look at their differences. Why is it so important in the cryptocurrency market? We invite you to read on!
Market Cap – the market capitalization of cryptocurrencies
Market capitalization is used by investors as a benchmark for both stocks and cryptocurrencies. Market Cap is the sum of all cryptocurrency coins currently in circulation multiplied by the current price of the coin. The formula for Market Cap is therefore trivially simple – it is the product of the supply of coins and the price per coin.
Market capitalization is often used in rankings of the popularity and size of a particular digital asset. Cryptocurrencies with a larger market capitalization are very often rated as more popular. And why? More people want to have a cryptocurrency in their wallet at an attractive price.
Also, cryptocurrencies with a higher market capitalization are inherently assumed to be a more stable investment than those with a lower one.
Why is Market Cap so important to investors?
The Market Cap gives them an overall view of the status of a particular cryptocurrency or project is at. In addition, you can also use the Market Cap of an asset to determine the overall value of a particular cryptocurrency. This allows you to make more informed investment decisions. It is not only about a safe purchase, but also about its growth potential.
The market capitalization can also provide information about the current trend of the market. Example: If cryptocurrencies associated with a decentralized project rise or fall in the rankings, this can be a sign that the market is attracting or losing investors.
How does market capitalization affect cryptocurrencies?
You have already established that market capitalization is a fundamental measure of the overall value of the market. When a cryptocurrency has a high market capitalization, people perceive it as more reliable and trustworthy. If the Market Cap is low, the asset in question is new to people, speculative and less trustworthy.
Of course, psychologically speaking, a large Market Cap gives more confidence. But ‘small’ cryptocurrencies are also good for investors. They have potential and, above all, room for growth.
Fully Diluted Market Cap – Definition
Fully Diluted Market Cap (FDV) refers to the future market capitalization of a project or cryptocurrencies. FDV is a very simple concept. It is based slightly on the idea of Market Cap, which refers to the total value of all cryptocurrencies on the market at a given point in time. However, the Fully Diluted Market Cap looks at the future rather than the assets currently available on the market. Unlike Market Cap, the FDV indicates what the market capitalization of a coin would be if all possible coins were already issued.
Remember, however, that the Fully Diluted Market Cap makes no predictions about subsequent prices. It only shows what the market capitalization would be if all coins came to the market at the current price. This is a very helpful indicator as it allows us to assess whether a cryptocurrency is overvalued or undervalued.
Interesting fact: When the market capitalization of an asset changes drastically, the supply of the asset increases, which could be a sign that the current value of a coin is wrong.
How do you calculate the Fully Diluted Market Cap?
Simple. You need two pieces of data: the maximum number of coins a cryptocurrency will release and its current market value. Multiply these two numbers together, and your result is the FDV.
Market Cap versus Fully Diluted Market Cap
Remember that these two concepts are different. Market Cap refers to the current market capitalization of a cryptocurrency and is not helpful in predicting its future. Market Cap shows us the size and current popularity of a particular cryptocurrency.
However, the most important difference between Market Cap and Fully Diluted Market Cap is that market capitalization does not tell us how the growth of a cryptocurrency will affect its popularity. This is especially the case when all coins are spent. FDV gives you an estimate of this.
Overall, the difference between FDV and Market Cap should be small. A drastic difference between the two indicators suggests that there will be a lot of inflationary pressure when new coins are issued. This could be a warning sign that the current value of the coin is overvalued.
When is Fully Diluted Market Cap dangerous?
FDVs are particularly important when the exchange rate of a cryptocurrency is significantly higher than the current market capitalization. Of course, there is no fixed limit for when an FDV becomes dangerous.
However, the generally accepted rule of thumb is that a Fully Diluted Market Cap of more than 10 times the token’s current market capitalization is a warning sign. FDVs are associated with two significant problems in the market:
- Inflationary tokenomics.
A high FDV relative to total market capitalization is worrying, as it shows that the coin will be subject to inflation. Cryptocurrency prices are determined by supply and demand. Assets that are currently highly valued but will soon have more tokens on the market are risky.
Such an increase in supply tends to reduce the value of the coin. The exception is when there is high demand. However, as projects like TryHards (TRY) have shown, most cryptocurrencies with inflationary pricing and tokenomics lose value very quickly.
- High pressure from sellers.
If the Fully Diluted Market Cap of a particular cryptocurrency is high, investors may consider it overvalued. Consequently, they will want to sell it. Such pressure caused by FDV can influence current cryptocurrency prices.
Is FDV a good indicator?
There is no clear answer to this question. For sure, it allows us to better predict the future of a particular cryptocurrency and its upcoming supply. It allows us to avoid wrong decisions. By comparing the FDV with the market capitalization, it is very easy and quick to see when the current price of a particular coin is a bit too high.
Remember that cryptocurrencies with a high Fully Diluted Market Cap are not coins you want to invest all your money in. Instead, consider selling them before inflation reduces their value.
On the other hand, a high FDV is not always a death sentence for a particular cryptocurrency. Fully Diluted Market Cap is also not an accurate indicator of price. So, never make a decision based on one indicator alone.
For this reason, it is important to understand the overall tokenomics of a particular cryptocurrency. Take the time to analyze the price data and find out how a particular coin really works before making an investment decision. Of course, the FDV is a helpful tool, but it is no substitute for thorough research.
Summary
Both indicators are a very useful way to see how a particular cryptocurrency or project is performing in the market. However, it is worth not blindly following them and including other research in your analysis to better understand the project in question.
