What Is Fully Diluted Valuation (FDV) In Crypto?
The term FDV often pops up while searching for crypto investments. You may also have seen the term appear in crypto-related news. Curious to know what it means? Or confused between the FDV and market cap? Don’t worry, we’ve got you covered.
The article covers the definition of FDV, how it is calculated, its significance, and its limitations. Further, we discuss the key difference between the FDV and the market cap as well.
What Is Fully Diluted Valuation (FDV)?
The Fully Diluted Valuation (FDV) represents the total potential value of a cryptocurrency. It’s calculated by considering all the tokens generated, locked, and scheduled to release. It shows the total value of a project rather than the value of currency in circulation. The following formula is used to calculate the Fully Diluted Valuation (FDV).
Fully Diluted Valuation (FDV) = Token Price X Total Supply
Why is FDV important for Investors?
The FDV is crucial for investors due to the following reasons.
1. To Gauge the Long-term Potential of a Crypto Project
The FDV gives a bird’s-eye view of the total potential value of a crypto project. This will empower the investors to gauge the long-term prospects of the project beyond the current scenario. Calculating the FDV is crucial for making informed investment decisions.
2. To Assess the Potential Dilution Risks
For a particular currency, the circulating coins may be just a small part of its total supply. If the remaining tokens are released in the future without any increase in demand, the token possesses a dilution risk. By finding the difference between the FDV and market cap, the investors can assess such dilution risks early.
3. To Compare Various Crypto Projects
For different crypto projects, the date of release of coins and their supply at different points in time vary. These limit the possibilities for fair comparison. The FDV, on the other hand, considers all the coins in circulation, scheduled and locked ones as well; hence, calculating the FDV will empower the investors to make fair comparisons.
You can also explore What Is DeFi? Decentralized Finance Explained for understanding decentralized projects.
Limitations of FDV
Even though FDV gives crucial insights about a given cryptocurrency. The method is not flawless. The FDV has certain limitations. The following section covers the limitations of FDV.
- It is speculative: The FDV is calculated based on many assumptions. While calculating the FDV, it is assumed that the price of the token in question remains constant. But the prices are prone to changes due to the volatile nature of the market.
- Does not account for the date of release of coins: The FDV estimates the total value, but it doesn’t account for the date of release of the coins.
- The FDV may overestimate the value of a crypto project: The FDV may potentially overestimate the value of certain projects, especially for early-stage projects.
- Does not account for the changes in governance: Any changes in the governance decision can influence the maximum supply. The FDV does not consider such changes.
Difference Between Fully Diluted Valuation (FDV) and Market Cap
People often get confused between the terms Fully Diluted Valuation (FDV) and Market Cap. Understanding the difference between them is essential for making informed decisions. The following section covers the fundamental differences between them.
- The market cap is calculated based on the value of currently circulating coins, FDV; on the other hand, it considers all the tokens circulating and yet to be released. It gives a more comprehensive view of the crypto project.
- The market cap represents the current status of the token, whereas the FDV represents the total potential market value.
- Considering the market cap involves less risk, as it is a more realistic value based on the current scenario. The FDV involves a higher risk as it takes unreleased tokens into account.
- The market cap is more suitable for analysing the current situation. Contrary to it, FDV is more suitable for understanding the long-term potential of a crypto project.
Despite having drawbacks, both market cap and FDV are important for investors to make informed decisions.
Final Thoughts
The FDV is an important parameter for investors to make wise investment decisions regarding various cryptocurrencies. It gives an idea about the long-term potential of a crypto project. But the FDV also has its limitations, so it needs to be used after considering other parameters as well.
The post What Is Fully Diluted Valuation (FDV) In Crypto? appeared first on BiteMyCoin.
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