Digital finance and decentralized finance are the two inevitable factors in the contemporary financial system. It has gained momentum in recent years and is now considered the best financial option. Both the system has different methodologies and different terminologies. Decentralized finance is a financial system that uses blockchain technology as the backbone of the entire network. There are a lot of complex terms in it, and a thorough understanding can only ensure you a safe environment and reap profit.
The cryptocurrency ecosystem is a complex arena that requires a comprehensive understanding of technical terms and jargon. Having in-depth knowledge of the basic terms and processes will definitely ease the activities and transactions in the system.
Fully diluted valuation (FDV) is an important term associated with the cryptocurrency ecosystem. This article aims to explain the concept comprehensively and create a better understanding of the crypto terminologies.
Fully diluted valuation (FDV)- Explained
Table Of Contents
- 1 Fully diluted valuation (FDV)- Explained
- 2 How Fully diluted valuation is calculated?
- 3 What is the use of Fully diluted valuation?
- 4 How do FDV and market capitalization determine the worth of the project?
- 5 Factors influencing the Fully diluted valuation
- 6 Challenges of Fully diluted valuation
- 7 Conclusion
Fully diluted valuation is a concept used to estimate the total value of the project by using the total supply rather than the circulating supply. This is the factor that helps to determine the future potential of the project. The future potential, future supply, and risk assessment all can be analyzed using a Fully diluted valuation. The investors can compare two projects and determine the long-term value of the respective projects.
They can conclude the value even if the amount of circulating supply and total supply are different. FDV can give you a hint about the future supply impact of the coin. High FDV indicates that numerous coins are yet to be released. This could affect the price of the coin since the flow of large amounts of currency can dictate the price variation and fluctuation. Proper risk assessment can be done with the help of FDV statistics. If the difference between Fully diluted valuation and circulating market capitalization is large, that means there is a high risk of volatility.
Fully diluted valuation can be defined in a simple statement. It is the total value of the market capitalization of a cryptocurrency if all the available tokens are in circulation. FDV considers not only the available token count but also the possible coin count that might be produced in the market via staking, mining, etc.
How Fully diluted valuation is calculated?
Fully diluted valuation(FDV) = Current Price of the Token × Total Supply of the Token
- Current price of the token: the current price of the token is the most recent price value of a particular crypto coin in the reputed exchanges.
- Total supply of the token: the total supply of the token refers to the maximum number of tokens that exist within a cryptocurrency blockchain system.
The Fully diluted valuation of a particular crypto project can be calculated by multiplying the current price of the token with total supply of the token.
For example, if a cryptocurrency coin is valued at $5 and the project has a total supply of 100 million tokens, then the Fully diluted valuation of the project is 500 million.
What is the use of Fully diluted valuation?
Offering a comprehensive market analysis
Fully diluted valuation helps investors understand the upcoming market performance better. It can deliver a more detailed analysis than the one measured with the market capitalization. FDV helps investors and traders understand the market based on future token delivery. So a comprehensive analysis can be done with the help of FDV.
Cryptocurrency comparison
Enabling the comparison between two entirely different cryptocurrencies or crypto projects is another use of Fully diluted valuation. There will be some cryptocurrencies that show the same market capitalization in the market, so the comparison cannot be done using market capitalization, so relying on FDV is the best option. The total supply of the coin will most likely be different for the two projects, and then FDV shows the actual potential of the two projects. Then the comparison process will become easier and authentic.
Assessment of potential risks involved in the cryptocurrency
FDV can deliver information on potential risks that can happen in the future. A cryptocurrency showing a high FDV might face an increased future dilution and a token with a low FDV might only face less future dilution and it may be the more stable token than the coin with a high FDV.
How do FDV and market capitalization determine the worth of the project?
The relation between fully diluted valuation and market capitalization has a significant impact on determining the potential of the respective projects. This relation works on 4 conditions. They are,
Low market cap, high FDV
This condition defines the present value of the project as low and has higher potential in the future. Projects showing these trends will be a future gem.
High market cap, low FDV
The current value of this project is higher right now but the future value could be lower than the existing value.
Low market cap, low FDV
The project’s current value and future state are not optimal. This might be a new project or a struggling one to find its own place in the market.
High market cap, high FDV
This condition shows it has a promising and bright future. It will show a strong current market value and a possible future value.
Factors influencing the Fully diluted valuation
Tokenomics and price volatility are the important factors that influence the FDV. Tokenomics can make a huge difference in the FDV. Total supply, circulating supply, initial circulation of the token, and market capitalization all are the key factors that influence the Fully diluted valuation of a particular cryptocurrency.
Price volatility can influence the Fully diluted valuation of a cryptocurrency. A sudden price change will significantly alter the FDV value. Considering the price volatility before calculating the FDV is recommended.
Challenges of Fully diluted valuation
The important challenges of FDV are the issues regarding token issuance, market manipulation, regulatory changes, and technology. The creation and circulation of new tokens is always a hard task for crypto projects. This can affect the FDV and become a challenge for it. This confusion regarding the total supply will create an inaccuracy in the FDV.
Market manipulation is another challenge faced by the FDV. sudden price fluctuation will lead to an inaccurate calculation of FDV. sudden market fluctuation will create confusion in the future market performance of the particular project. Investors and traders may find FDV as a less reliable measuring factor if market manipulation occurs frequently.
Conclusion
Investment in crypto projects is one of the most preferred ways of moneymaking in the 21st century. It can provide a huge amount of profit when you pay attention to the basics of the system. There are a lot of factors out there that need to be considered before investing in a crypto project. The investor should know the basic terminologies of the cryptocurrency ecosystem.
Fully diluted valuation is a key term in the crypto market. Analyzing the capability and future value of particular crypto projects based on the Fully diluted valuation is a necessary process before investing or even before entering into the crypto sphere.
Develop a comprehensive knowledge of the entire crypto ecosystem and understand the basic terminologies to flourish in the system and to make a more enhanced crypto profile from it.
