New cryptocurrencies enter the market on a monthly basis, which can make it difficult to discern good opportunities from bad. Market capitalization, or market cap, is one metric that investors commonly utilize to measure the popularity of cryptocurrencies. However, another metric that can help investors evaluate the future potential of a cryptocurrency’s price is the fully diluted market cap.
While sharing a similar name, market cap and full diluted market speak to different aspects of a cryptocurrency project. Understanding the difference between the two can give investor’s an edge and assist with finding the best opportunities. In this guide, we will clarify the difference between market cap and fully diluted market cap, highlight the important implications of using the fully diluted market cap, and explain why the fully diluted market cap should be considered when evaluating cryptocurrencies.
What Is A Crypto Market Cap?
A cryptocurrency’s market capitalization, often shorted to market cap, defines the market value of a cryptocurrency at any one time. Market cap is calculated by multiplying the number of coins in circulation by the current market price of the coin.
Market Cap = Circulating Supply Of Coins X Current Price Per Coin
Theoretically, if the current price of Bitcoin was $20,000 and the circulating supply of coins was 19 million, the market cap of the coin would be $380 billion (19,000,000 x $20,000). Coin aggregators, such as CoinMarketCap and Coin Gecko, regularly use the market cap to rank cryptocurrency projects. The larger the market cap the more market value a digital asset holds.
Bitcoin holds the largest market cap of any coin within the cryptocurrency industry. It has held the number one market cap position since it was created in 2009 and has remained the most popular throughout. More people have been willing to put capital into Bitcoin in comparison to all other coins or tokens in the industry which can be seen in a Bitcoin dominance chart.
Alongside an insight into market value, market cap provides a good indication of the stability of a digital asset. While all cryptocurrency assets are extremely volatile, the higher the market cap, the less likely price will be affected by market news or a new inflow of investment. In comparison, the price of smaller market cap coins can be severely affected by changes in market sentiment or small influxes of capital.
Using market cap, cryptocurrency coins and tokens are often ranked by size:
- Large-caps. Large-cap cryptocurrencies have a market value of over $10 billion. As a result of the higher market value, these digital assets are often the most stable.
- Mid-caps. Mid-cap cryptocurrencies have a market cap between $1 billion and $10 billion. The lower market value means that these cryptocurrencies have the potential for growth but also have the capacity to rise and fall rapidly.
- Small-caps. Small-cap cryptocurrencies have a market cap of less than $1 billion. The price of these cryptocurrencies can move rapidly and, therefore, all digital assets within this category have the greatest risk-to-reward ratios.
What Is A Fully Diluted Market Cap?
In comparison to market cap, the fully diluted market cap, also referred to as the Fully Diluted Valuation (FDV), estimates the market value of a cryptocurrency when all coins or tokens in the total supply have entered circulation. Many cryptocurrency networks or projects cap the maximum number of coins or tokens. Often referred to as the maximum supply, this number defines the maximum number of cryptocurrencies that can ever enter circulation. Cryptocurrencies with a maximum supply often do not release all coins or tokens at once. Instead, digital assets can be released using distinct distribution mechanisms.
For example, Bitcoin has a total supply of 21 million coins. However, at the time of writing, only 19.09 million Bitcoin is left in circulation. New coins are released every time a new block is added to the blockchain. These new coins are rewarded to the parties involved with keeping the blockchain operational, such as miners or validators. Likewise, the decentralized crypto exchange Uniswap has a total supply of 1 billion UNI tokens with only 734 million in circulation. In the case of blockchain-based applications, such as Uniswap, new tokens are distributed through a combination of staking rewards, liquidity mining, and airdrops.
Importantly, the difference between the circulating supply and total supply is how the fully diluted market cap is calculated. The fully diluted market cap of a cryptocurrency is calculated by multiplying the number of coins or tokens in circulation by the current market price.
Fully Diluted Market Cap (or Fully Diluted Valuation) =
Maximum Supply Of Coins/Tokens X Current Price Per Coin/Token
For example, if the price of Bitcoin was $20,000 and the circulating supply was 19 million, the market cap of Bitcoin would be $380 billion (19,000,000 x $20,000) - as per the previous example. However, as the maximum number of Bitcoins is 21 million, the fully diluted market cap if all coins were released would be $420 billion (21,000,000 x $20,000).
Why Is The Fully Diluted Market Cap Important?
While the price and market cap of a coin might look appealing, if only a small fraction of the maximum supply has been mined or minted, investors may run into price problems at a later stage. The fully diluted market cap takes into account a cryptocurrency’s market value when all tokens are distributed. It is, therefore, an extremely useful indicator for highlighting if a cryptocurrencies supply could be severely diluted. In other words, it can provide insight into the future supply of a cryptocurrency, which can be extremely useful for determining whether a cryptocurrency is inflationary or deflationary.
To encourage investment and sustain interest, the majority of cryptocurrency projects employ inflationary tokenomics. Over time more tokens are released into circulation, either as block rewards or via other reward mechanisms. While a small amount of inflation is not a bad thing, high inflation levels can eventually put pressure on a token’s price. It is, therefore, a dynamic that all long-term cryptocurrency investors should be aware of.
If the fully diluted market cap is significantly higher than the market cap it can be prudent to ask why? When a fully diluted market cap is high, it could be that a large number of coins or tokens are yet to hit the market.
If coins or tokens are released in the market slowly, buying demand may be able to compensate for any additional selling pressure. However, if coins or tokens are released in bulk, such as at the end of a predefined vesting period, selling pressure may cause a cryptocurrency to fall in value. In the past, this has resulted in some cryptocurrencies falling below an initial seed round or Initial Coin Offering (ICO) price.
If a fully diluted market cap is high relative to the market cap, consider the following 3 questions before investing:
- How will the maximum supply be released in the future? For example, will the circulating supply double within the next year or will a small percentage of the total supply be released over the next X number of years?
- What are a cryptocurrency’s use cases? Is that likely to expand? The larger the expected growth and use case, the more likely a cryptocurrency will retain value.
- How will the cryptocurrency’s supply be affected by consistent block or staking rewards?
While inflationary mechanisms are more common, there are also cryptocurrencies that employ deflationary mechanics to lower a cryptocurrency’s supply. For some cryptocurrencies, all coins or tokens may be released within the first few weeks of the project launch. A project may then employ deflationary mechanics to lower a cryptocurrency’s supply with time - sometimes referred to as a burning mechanism. For projects with stationary or deflationary tokenomics, the fully diluted market cap will either match or be lower than the current market cap.
It is important to note that coin aggregators, such as Coinmarketcap or CoinGecko, will not calculate a fully diluted market cap that is lower than the current market cap. These applications will continue to calculate FDV using the cryptocurrency's maximum supply. In these instances, the true fully diluted market cap would need to be calculated independently using the best estimate for a cryptocurrency’s burn rate and, therefore, the expected maximum supply in the future.
Market Cap (MC) To Fully Diluted Valuation (FDV) Ratio
When comparing a cryptocurrency’s market cap to the fully diluted market cap, it is common to see the relationship expressed as a ratio. A low MC/FDV ratio infers that the fully diluted market cap is significantly higher; meaning a significant number of cryptocurrencies still need to be released to the market. This may be true when a blockchain or project is first launched or when the total supply of a cryptocurrency is extremely large. A low ratio may also infer that the upcoming supply may not match the current demand.
In comparison, projects with an MC/FDV ratio over 60% are often considered to be more suitable long-term investments, as future inflation is likely to be sustained by buying pressure. For any MC/FDV ratio, an investor should become comfortable with how the future supply of a cryptocurrency will be distributed to avoid unexpected price movements.
Limitations Of The Fully Diluted Market Cap
Understanding the fully diluted market cap and the insight it provides can be a powerful tool, however, there are a few factors that this metric cannot take into consideration.
- Future development proposals. It is common for a blockchain network or application to undergo development upgrades. However, development upgrades can sometimes change the fundamentals of an entire project. Future changes to the fundamentals of a project cannot be accounted for in the fully diluted market cap.
- Future competitors. The fully diluted market cap cannot take into account competing projects that may enter the market at a later stage. Competing projects can drag market share away from others, which can negatively affect the price. For example, if a competitor to Bitcoin emerges and begins to take market share away, Bitcoin may become close to redundant which would result in the market value of Bitcoin falling.
- Changes to the development team. The team behind a cryptocurrency can be just as important as the development roadmap. Changes in the team can cause ideas and visions to change, which, again, can change the fundamentals of a project with time.
- Changes in asset price. Alongside competition and potential changes to fundamentals, the greatest limitation to the fully diluted market cap is that the metric assumes digital asset prices will remain the same once the maximum supply has been reached. This is almost never the case.
When the maximum supply of a cryptocurrency is released into circulation, it will almost certainly change the market price. The change in asset price would then change the value of the fully diluted market cap. For example, if Bitcoin had a circulating supply of $19 million coins and a price of $20,000, the market cap would be $380 billion. We also know that the fully diluted market cap at the time would be $420 billion.
Now imagine that years later all 21 million coins have been mined, but the price of Bitcoin has actually changed to $40,000. Instead of the fully diluted valuation of $420 billion, the market cap would be $840 billion (21,000,000 X $40,000) - double what the fully diluted market cap was valued originally.
Frequently Asked Questions
The fully diluted market cap is a useful metric when analyzing the potential future value of cryptocurrency investments. Unlike the market cap, the fully diluted market cap estimates the future market value of a cryptocurrency once the maximum supply has been distributed. Comparisons between market cap and fully diluted market cap can then be used to determine if the future supply of coins could weaken the price.
Analyzing cryptocurrencies using only the market cap may mean that investors are not aware of future changes to supply. The fully diluted market cap can help investors account for this and help determine the likelihood that an asset can sustain its price heading into the future.
The fully diluted market cap is a metric that was first used in the equity markets to analyze stocks. In stocks, the fully diluted market cap is an estimate of the market capitalization when taking into account all shares in circulation, plus any additional shares that can be exercised in the future.
The fully diluted market cap is a metric that can sometimes be overlooked by investors but should be fundamental when analyzing a cryptocurrency. Used in conjunction with market cap, the fully diluted market cap can provide an indication as to the future inflation of a cryptocurrency and, therefore, help investors to begin questioning future supply. This makes it a particularly valuable metric for long-term investors.
While useful, it is important to remember that the fully diluted market cap is not the only metric that should be relied upon when determining the potential profitability of cryptocurrencies. A well-rounded evaluation should take into account a variety of other fundamentals such as the project’s vision, the team, the cryptocurrency’s use cases, and other aspects of a cryptocurrency’s tokenomics.