Understanding Market Cap and FDV
Too many people are not (yet) familiar or do not fully understand the concepts of Market Capitalization (MC) and Fully Diluted Valuation (FDV). Here are some explanations.
Definitions
Market Cap of a Project/Token
Market Capitalization is equal to the amount of tokens in circulation (current circulating supply) * the token price.
All the tokens in circulation are potentially tradable in the market (in centralized and decentralized exchanges). You can either buy or sell these tokens, or hold them in your wallet.
Fully Diluted Valuation of a Project/Token
FDV or Fully Diluted Market Capitalization is the max amount of tokens that can ever exist * the token price.
It covers all the tokens currently circulating in the market, plus all the other non circulating tokens (not released yet in the market (will be released via future inflation or governance decision) or staked/locked).
Understanding MC vs FDV
MC and FDV are equally important. Any crypto investors should take a look at both metrics.
The key differentiator is Future Inflation.
Future inflation covers new tokens issued on the market everyday. It is a tool used by all crypto projects to develop themselves: attract users, grow TVL, pay expenses, incentivize certain types of behaviors, etc.
MC does not take into account that future inflation but FDV does.
Example 1
Imagine a project which just went live for some days, does nothing and advertises very high APY (via future inflation).
Current supply: 1M tokens
Max supply: 100M tokens
Future inflation: 10% daily
Current market cap: $1M USD
FDV: $100M USD
From a MC perspective, you can think that’s cheap but from a FDV perspective you will understand that’s super expensive because future inflation is high and market cap will reach FDV soon.
That’s basic Yield Farming projects which insiders farm from the very beginning and advertises them to you once they reach a “tiny” market cap. You will most probably end up losing money.
Example 2
Imagine a project which have a working product (lending and borrowing dApp, innovative DEX, etc.) and generates fees.
Current supply: 1M tokens
Max supply: 100M tokens
Future inflation: 0.01% daily
Current market cap: $1M USD
FDV: $100M USD
Very very cheap from a MC perspective and cheap from a FDV perspective ceteris paribus. Market cap will take many years before reaching FDV.
Future inflation can also result from team and investors tokens which have reached their unlocks date and vesting schedule.
To go further
You can compare projects by MC or FDV but there again there are limitations. Indeed if future inflation is highly different, comparing two projects with MC or FDV won’t be the optimal solution. The two above examples are a prime illustration as they have the same MC and FDV but they are SO DIFFERENT.
One Year forward Market Cap
So you could take something in the middle: derive a one year forward market cap which would be the market cap of the project in one year (taking into account a constant price and future inflation for the next year). That metric would be easily comparable between any projects but will be difficult to calculate given all information required which are not always easily available.
Finally, don’t forget that if the protocol has a DAO and that governance allows it: token holders could vote to change future inflation (our 1Y forward MC would be impacted) or decide to burn tokens (our 1Y forward MC would be impacted and the FDV would decrease).
Final thoughts
KISS: Keep it Simple Stupid!
As explained above, there are no magical formula whether you want to calculate and use a complex 1Y forward MC or a simple MC or FDV, there are no magic formula solving all the issues related to crypto valuations.
You need to use your brain and understand the project’s tokenomics and future inflation to derive any conclusion.
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