What is fully diluted valuation in crypto?

The global supply of crypto tokens – digital assets that represent value and facilitate transactions on the blockchain – is constantly growing. Millions currently exist, with thousands more created every day. With so many tokens out there, figuring out which have real potential and which are merely hype isn’t always easy.

To help estimate a token’s value, investors often analyze a metric known as fully diluted valuation (FDV). This estimates what a token’s total market value would be if all of its supply were in circulation. While it doesn’t guarantee a token's future performance, FDV can provide helpful insight into whether a token is undervalued or overvalued – or, in other words, if it's more likely to be a good or bad investment.

In this guide, we’ll explain fully diluted valuation – what it is, how it’s calculated, and how it helps investors evaluate crypto projects.

What is FDV in crypto?

Fully diluted valuation is a metric that estimates a crypto token’s potential value by multiplying its total supply – including both circulating and unreleased tokens – by the current price of a single token. Unlike market capitalization (market cap), which only accounts for the tokens that are currently in circulation, fully diluted valuation considers the entire supply that could eventually enter the market.

A similar concept exists in the stock market. Just as a company’s valuation includes its existing shares and any additional shares that could be issued in the future, FDV takes into account both the tokens already available and those still locked or yet to be released.

Why does FDV matter to crypto investors?

Understanding fully diluted valuation comes down to supply and demand. When more tokens enter circulation, demand must increase proportionally for the price to remain stable. If demand stays the same while more tokens become available, the price may drop. Conversely, if tokens are permanently removed from circulation through a process called burning – where tokens are sent to an unusable blockchain address and effectively destroyed – the reduced supply can drive crypto prices higher, assuming demand remains steady.

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What is fully diluted valuation used for?

Fully diluted valuation helps investors assess how a token’s price might change over time and whether it's a smart investment.

Let’s say you’re considering buying a token called PEPE, which has an FDV of $2 billion. However, only 10% of its total supply is currently tradeable, while the remaining 90% will enter circulation within the next 30 days. That’s a lot of new tokens hitting the market in a short time. Should you buy now, or would it be better to wait? 

Fully diluted valuation helps make sense of situations like this by evaluating potential risks and opportunities, providing a more complete picture of the market, and comparing different cryptocurrencies.

Let’s use the PEPE example to explain each of these three factors:

Evaluating potential risks and opportunities

Crypto markets are full of both risks and opportunities. FDV helps investors evaluate which tokens have growth potential and which might struggle to maintain their value.

If all its tokens were in circulation, the hypothetical PEPE token – with a fully diluted valuation of $2 billion – would rank among the top 80 cryptocurrencies by market cap. That suggests potential for growth. But there’s a catch: Only 10% of the tokens are currently tradable.

For PEPE to reach and sustain its $2 billion FDV, demand must keep up with supply. If the remaining 90% of tokens enter the market and holders start selling, prices could drop. The token’s success depends on whether demand increases or existing holders resist the pressure to sell.

Gaining a comprehensive view of the market

The crypto market is complex, with many factors influencing token prices. Bull and bear cycles, emerging trends, project fundamentals, government regulations, and breaking news can all impact price movements in the short and long term.

FDV is just one piece of the puzzle when analyzing the market. Let’s revisit the PEPE example.

Imagine the market as if it were a pie. FDV is one slice – it shows that PEPE could reach a $2 billion valuation if all tokens were in circulation and demand kept up. But other factors matter too: the project’s team, the usefulness of its product, and even broader trends – like younger investors entering crypto and favoring meme-based tokens.

FDV isn’t the only metric to consider, but when combined with other factors, it helps provide a more complete picture of a token’s potential.

Analyzing and comparing cryptocurrencies

FDV can also help you compare different cryptocurrencies by looking at two key factors:

• Absolute FDV value: A lower FDV may indicate limited growth potential, while a higher FDV suggests greater potential. However, FDV alone doesn’t determine whether a token is a good investment.
• Circulating supply versus total supply: The percentage of tokens already in circulation plays a major role in price stability and market behavior.

Let’s use the PEPE token again, but this time, we’ll compare it to another hypothetical token, GRONK. Like PEPE, GRONK has a fully diluted valuation (FDV) of $2 billion, putting both tokens in the same league in terms of potential market size. However, the similarities end there.

GRONK already has 50% of its total supply in circulation, while PEPE only has 10%. This means GRONK is less likely to experience sharp price swings due to new tokens flooding the market, making it potentially more stable.

Now, let's add another factor: PEPE is inflationary, meaning its total supply will increase over time. GRONK, on the other hand, is deflationary, meaning its supply will shrink. If demand remains the same, PEPE's price may drop as more tokens are released, while GRONK's price could rise due to its decreasing supply.

Here, FDV helps you determine which token might be a safer buy. It’s just one factor – but when considered alongside market trends, token utility, and overall demand, it's an excellent metric for evaluating cryptocurrencies.

How is fully diluted valuation calculated?

You can calculate FDV with a simple formula:

Fully diluted valuation = Total supply of tokens * Current price of token 

For example, if a token has a total supply of 100,000 and each token is worth $1, the FDV would be $100,000. But if each token’s price rises to $1,000, the FDV jumps to $100 million.

Let’s look at a real-world example with Bitcoin (BTC). Bitcoin has a fixed total supply of 21 million coins. If the current price of 1 BTC were $100,000, we’d calculate FDV like this:

21,000,000 × $100,000 = $2,100,000,000,000

This results in Bitcoin having an FDV of $2.1 trillion.

How does a fully diluted valuation impact crypto prices?

FDV influences crypto prices in several ways, mainly based on how investors compare it to other key metrics – especially market cap. Investors often use FDV and market cap together to assess a token’s potential risks and rewards. Here’s how different FDV-to-market cap scenarios play out:

• Low FDV, high market cap: These are often well-established cryptocurrencies with strong demand. A low FDV means most tokens are already in circulation, reducing the risk of sudden sell pressure. Investors tend to see these crypto assets as relatively stable.
• High FDV, high market cap: These tokens are in demand but still have significant growth potential if demand keeps up as more tokens enter circulation. Investors may view them as promising but will watch for future dilution.
• Low FDV, low market cap: These tokens may have little demand, often because their total supply is close to their circulating supply. Many stablecoins fall into this category since their value is meant to remain constant rather than appreciate.
• High FDV, low market cap: These are among the riskiest tokens. They have low current demand, but many unreleased tokens could flood the market, leading to heavy sell pressure. Many speculative memecoins fall into this category.

How investors perceive a token’s FDV relative to its market cap can drive short- and long-term price movements. When traders believe a token has strong future potential, they buy, increasing demand and price. Conversely, if they expect dilution or a price drop, they sell, applying downward pressure.

At their core, trading and investing involve game theory – understanding how other investors think and react can be part of your strategy. Some traders, for example, follow the principle of "buying when there's blood in the streets" (buying crypto assets when market sentiment is low).

As an investor, your goal is to identify opportunities while managing risks. Remember, FDV is one of many factors to consider, and understanding how it interacts with market cap and supply dynamics can give you an edge over other investors.

FDV vs. market cap: How they differ

Unlike FDV, which considers all tokens that exist or could exist, market cap only accounts for tokens that are currently circulating and tradable. However, the formula for calculating market cap remains the same:

Market cap = Circulating supply of tokens * Current price of token

Let’s revisit Bitcoin as an example. When calculating BTC’s FDV, we used its total supply of 21 million tokens. But its circulating supply is currently 19.8 million.

Using the formula for market cap:

$1,980,000,000,000 = 19,800,000 * $100,000

So, Bitcoin’s market cap is just below $2 trillion, which is very close to its $2.1 trillion FDV. This small gap suggests that BTC has more price stability than tokens, with significant differences between FDV and market cap.

To compare Bitcoin’s hypothetical FDV and market cap:

• Token price: $100,000
• Circulating supply: 19.8 million
• Total supply: 21 million
• Market cap: $2 trillion
• FDV: $2.1 trillion

Most major cryptocurrencies list these metrics on coin-tracking websites like CoinMarketCap or CoinGecko. However, for newer tokens, it's best practice to check the project’s smart contract or use a blockchain explorer to verify supply details.

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FDV helps investors gauge a crypto project's potential, but remember, no single metric tells the whole story. A smart investment strategy also considers fundamentals, market cap, and broader trends like adoption rates, regulatory changes, and market sentiment. 

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.