When diving into a new asset, it is important to know the basic footholds that define the overall asset for better understanding. Similar to how companies represent their values via their stock prices, market value and fully dilute market value are the two most common metrics that pop up while determining the value of a crypto asset.
While both the terms may somewhat be similar in value, both of them represent two different meanings. This article caters to the difference between the market cap and the fully diluted market cap of a crypto and why it matters. However, before diving in, let us take a quick look to understand the meanings of the terms.
What is Market Cap in Crypto?
Market cap in crypto, which is also referred to as market capitalization, means the total value of a crypto asset. It is often used to compare the magnitude of a crypto asset to the market as a whole, along with assessing the token’s popularity. In simpler words, a crypto token with a larger market cap is considered more popular. The reason is that the higher the value, the more interested or willing crypto investors are to invest in the asset at its current price.
One of the important factors that is used in determining the long-term stability of a crypto investment is its market capitalization. Any digital assets with a lower market capitalization has the tendency to be more volatile than those which have much larger market cap. As a result of this, crypto assets with relatively smaller market capitalization sometimes are at a higher risk of seeing their value fluctuate dramatically.
Current Market Cap = Current Price × Circulating Supply
Use our crypto market cap calculator to easily calculate the current market value of tokens.
What is Fully Diluted Market Cap?
One of the other tools that every trader should have in their arsenal is the fully diluted market cap. To describe it further, a fully diluted market cap is derived when the total value of the crypto as per today’s price is multiplied by all the available tokens of that crypto that are in circulation. With this capitalization method, experts assume that the market cap of the token in the future will grow in line with the amount of circulating supply at a given moment.
Fully Diluted Market Cap = Current Price × Maximum (or Total) Supply
So, why do crypto enthusiasts use Fully Diluted Market cap? Well, there are three fundamental reasons that they use the fully diluted market cap. They are;
- To assess the valuation of a project and the fair value before and after the launch.
- It also helps in understanding the emissions from the tokens and as a result, gauge potential selling pressure.
- It helps in determining the team potential and the market sentiment towards the crypto project.
The Implication of a Fully Diluted Market cap
One very important thing to keep in mind while looking at the fully diluted market cap is that it does not really take into consideration the potential decrease in the price of a token with the possible eventual increase in its circulating supply. This is a tricky part to include, even though it may show a higher market cap. A fully diluted market cap assumes that the market cap in the future will eventually increase in direct proportion to the current circulating supply at any given time.
Nevertheless, that might not be the case. If one looks at the theory, the supply of the token has a chance to increase. If that happens, it may result in pushing down the price of the token due to oversupply, causing token inflation. Therefore, when investors look at the fully diluted market cap, it should be taken into account that this metric does not consider the impact of inflation on the fully diluted market cap.
Also Read: Market Cap vs Circulating Supply
Market Cap vs Fully Diluted Market Cap
Though the term “market cap” gets used a lot, the term is not helpful when considering the future of a coin. The biggest difference between market cap and fully diluted market cap is that a market cap does not give any indication on how the crypto token’s growth will affect its popularity. On the other hand, a fully diluted market cap presents an estimate of how popular a crypto has the potential to be, once all of the coins are released or mined.
Thus, to calculate a crypto’s fully diluted valuation allows one to consider what the coin’s value might be like in the future.
Interestingly, using FDV crypto metrics alongside standard market cap gives insight into a coin’s current valuation. In a proper situation, the difference between the market cap and the fully diluted market cap of a crypto should be low. A huge difference indicates that there might be a lot of inflationary pressure as new coins are released.
Should Investors Care About a Fully Diluted Market Cap?
The metrics of a fully diluted market cap can be used as an indicator of the impact or the future of the token’s supply into the market. In the crypto space, many people are afraid of the increasing supply of coins or tokens.
However, a fully diluted value market cap might be a useful metric for long-term investors, as it gives a better insight to whether a project’s value is reasonable. An extremely high fully diluted market cap means that there will be a lot more tokens that can come into circulation.
Why a High Fully Diluted Market Cap Can Be Risky
To better understand why FDV crypto ratings are important, it is imperative to understand the problems associated with an abnormally high, fully diluted market cap. They are:
Inflationary Tokenomics
If there is a high ratio of market cap to fully diluted market cap, it is a problem as it shows the coin has the potential to be subjected to inflation. Since crypto prices are determined by the supply and demand of the token, a coin that is currently priced high but one that will soon have more tokens on the market might be a risk.
High Sell-Side Pressure
Since there is a chance that, as the FDV crypto metric becomes more popular, more investors will look at it to make their investment decisions, even if there is no plan to hold a crypto for the long term, a high fully diluted market cap can still cause issues.
Conclusion
Doing your own research is essential while planning or strategising crypto investments. However, the crypto market as an asset class is highly volatile, and even the strongest indicators need educated calculations to reach the risk tolerance of the investor.
