FDV- How Does This Valuation Metric and Unlocking Affect Cryptos?

FDV stands for Fully Diluted Valuation and is a metric derived by multiplying a coin’s maximum supply and price. This metric measures the risks involved when investing in a currency. If a coin has a high FDV to MCAP ratio, it may be risky as it struggles with supply inflation and sell-side pressure as more coins get released to the market.

Most people do not know about the FDV metric, and they end up locking their assets in projects that do not give them great returns in the long run. Currently, there is the issue of Venture Capitalists taking advantage of the crypto space. Several people, including Jack Dorsey, have tried to explain how these entities control the crypto space that should instead be decentralized.

During the launch of assets, some platforms conduct different sell rounds. Some of the sell rounds are for venture capitalists and institutional investors but with vesting periods to ensure they do not dump all the coins after they go public for trading. If the coin stays in the market long enough to complete the vesting period for the VCs and its circulating supply is still high, they may dump it, causing the price to drop significantly. 

Here is more information on why you need to be cautious about MCAP, FDV, and how assets get unlocked while selecting projects to lock your funds in.

FDV vs. MCAP

MCAP stands for Market Capitalization. It is the total net value of the crypto asset at any point in time. It can be realized by multiplying all coins in circulation with the coin price at the time. It is a metric that most online data trackers use to rank cryptocurrencies according to their size and popularity, as more popular coins have more locked value.

This metric translates that the coin with a high market cap is more stable than a lower market cap since it has more liquidity. That means it’s hard for the large-cap coins to experience too sharp price movements when significant transactions occur, meaning that the probability of market manipulation in such coins is low.

FDV is the total market value of an asset if all of the coins have been released into circulation. To calculate it, you multiply the maximum supply of the coin with the coin’s current price. This metric ignores the price change of the coin if all the supply was to be fully released into the market. 

It is known that the supply of an item mostly affects its demand. Therefore, an investor should calculate the ratio between the FDV and the actual MCAP of the asset before investing in it. The smaller the ratio, the safer the coin is from supply inflation in the future. Therefore, the FDV should not entice you to buy in on any project, but its ratio with the MCAP should caution you on what to avoid.

Why Is FDV an Important Metric While Investing in Cryptos?

Should you care about the FDV? Yes, you should! As many successful investors would say, the future of an asset is what should drive you to invest in it. If the asset does not look to get better in the future, it is not worth the risk. This strategy works best for those whose main agenda is value investing in long-term plans.

While the same asset could not look good in the future, it may be a haven for short-term investors. However, it is also advisable to check the project’s timelines. If you lock your funds believing that they will appreciate in the long term and hyperinflation beats you, the funds might devalue.

Take some Examples:

Bitcoin has a maximum supply of 21 million coins. Currently, the coin has a circulating supply of 19.056M coins. The ratio of the coins in supply vs. the maximum supply is almost 1:1. That shows that coin is already safe from hyperinflation. Even if the maximum coin supply was to be released now, it wouldn’t greatly affect its price.

Currently, its market cap stands at $570,332,134,644, while its FDV stands at $628,512,982,886. When you divide the MCAP by the FDV, you get 0.907. That means over 90% of the coin has been unlocked. Therefore, it is one of the safest investments with a long-term plan.

When you consider a coin like CRV or Curve DAO Token, it has a circulating supply of 459,552,285.88 CRV against a maximum supply of 3,303,030,299 CRV tokens. When you dived the Max supply with the circulating supply, you find out that it is 7.18 times larger than the circulating supply. That means if the maximum supply of the coin was to be released today, the coin would have an inflation rate of above 700%. 

The coin also has an FDV of $4,092,150,373 against a MCAP of $569,450,061. The ratio between the two shows that unless the coin’s circulating supply is cut soon, it is a risky investment vehicle in the long term. 

However, it is advisable to research every asset’s tokenomics before concluding anything. For instance, CurveDAO plans to release upto 2.26B CRV coins by July 2026. That means the coin supply will increase by 1.6M coins over the next four years. 

It’s already been two years since the coin was launched, and it has only managed to release 460M coins. Looking at its history and the plans, it is up to the investor to research carefully and decide whether to invest in such a coin with a long-term mindset. 

Final Word

The lock-up and vesting periods of crypto assets ensure that investors who buy the projects mostly during their private sale rounds do not dump them immediately after they are allowed for public trading. This strategy is there to control the inflation in the supply of the coins while providing liquidity.

The method the companies behind many crypto tokens use to unlock the asset matters the most as they could affect the supply of the asset. If the supply spikes, the demand tanks. 

Evaluating cryptocurrencies can be difficult because they operate in a 24/7 liquid market. That means the statistics change per second, and achieving 100% accuracy is impossible. Therefore, one uses relative valuations to tell how the market is developing. However, these valuations can also be misleading because the involved assets have different economic models that cause anchoring effects.

Since developers know that liquidity and the supply vs. demand dynamic are among the most important things to tackle in a crypto project, they develop different solutions. Some may use systems that incentivize users to hold their tokens to access given services. 

Therefore, it is up to the investor to research and criticize the economic models of crypto projects before investing in the. Also, every investor should ask themselves how the coins are owned. Who holds the most coins, and are they in circulation or the lock-up cycles. Also, if they decide to sell their coins, will they dump them in the open markets, or will they be rebought by someone else?