What is Fully Diluted Valuation (FDV): crypto meme or red flag?

In a crypto bull run where (almost) all boats rise with the tide and most crypto projects seem exceedingly promising, crypto valuation metrics are sometimes overlooked in favor of the hype driving these exciting new projects. As a result, we often see Fully Diluted Valuation (FDV) numbers reaching astronomical highs for various coins and tokens, despite possessing market capitalizations that are mere fractions of their FDV.

Curious as to whether FDV frenzy is a genuine concern? From understanding what FDV is to gaging FDV's effectiveness as a crypto valuation metric, here's all you need to know when it comes to Fully Diluted Valuations in the world of crypto.

What is FDV in crypto?

FDV is a metric used to estimate the future potential market cap of a cryptocurrency project. FDV assumes all tokens planned for creation are currently in circulation and multiplies the current token price by the total supply to arrive at this value. While FDV provides a sense of a project's potential, it's important to remember that it doesn't guarantee future value. The actual market cap may differ depending on factors like token release schedule, market demand, and price fluctuations.

How to calculate FDV

FDV's calculation can be summarized as the following formula:

FDV = Current price per token * Total supply

The part that'll require some clarification among crypto beginners is the concept of a project's total supply. In short, total supply refers to the maximum possible number of tokens that a project plans to create throughout its entire existence. This includes:

  • Circulating supply: Also known as the float of a crypto project, circulating supply indicates the tokens that are currently available for trading and use on cryptocurrency exchanges or within the project's ecosystem.

  • Locked tokens: Whether they're being vested or used for ecosystem growth, locked tokens represent a part of the total supply that's temporarily unavailable for trading. These locked tokens are typically planned to enter circulation later according to the project's roadmap or tokenomics schedule.

  • Mineable and mintable tokens: Among certain blockchain protocols, new coins are created through mining or staking processes. The total supply also incorporates all tokens that can potentially be mined or minted throughout the project's lifespan.

To further illustrate how to derive a crypto project's FDV, let's use the example of Bitcoin. With a reference price of $70,000 per BTC and a total supply of 21 million, this would effectively give an FDV of $1.47 trillion.

Market cap vs FDV

If the FDV formula seems familiar, you aren't far off the mark — it resembles the calculations involved with crypto market caps. The difference lies in how each crypto valuation metric treats token supply and lockups. Market caps only consider the coins and tokens currently circulating, whereas FDV incorporates the total number of coins/tokens that could ever exist. This includes the existing circulating supply, locked amounts that are temporarily unavailable for trading but are planned for release in the future, and the total amount that can potentially be mined or minted throughout the project's lifespan.

In fact, it's this key difference that's reignited a hotly debated argument within the crypto community on whether FDV should be recognized or if it should be treated as a comedic meme. To better analyze this, let's look into the arguments for and against FDV.

Evaluating the use of FDV as a valuation metric for crypto projects

While it's a meme for some, some traders do consider FDV a serious valuation metric to run through before deciding whether to trade a specific coin or token. Here are some pros and cons that argue for and against the use of FDV.

Pros

Cons

Future potential

Unrealistic assumptions

Easy comparison tool

Ignores existing adoption and demand

Pros of using FDV explained

  • Future potential: FDV offers a glimpse into a project's potential future market cap, allowing traders to properly envision the project's growth trajectory if all planned coins or tokens enter circulation. This can be a helpful indicator for long-term HODLers who believe in the project's prospects down the line.

  • Easy comparison tool: FDV allows for easier comparison between cryptocurrencies with different circulating supplies. For example, comparing the FDV of two projects with vastly different circulating supplies can provide a more holistic view of their potential market size.

Cons of using FDV explained

  • Unrealistic assumptions: FDV assumes all planned coins or tokens of a crypto project will eventually enter circulation. This might not always be the case, as a project's roadmap could be altered in the future to reduce the total planned supply in the form of token burns.

  • Ignores existing adoption and demand: FDV focuses solely on the number of coins/tokens, neglecting factors like user adoption, project utility, and overall market demand. A high FDV doesn't guarantee success if the project lacks real-world use cases or a strong community.

Now that we're clear about the pros and cons of adopting FDV as a crypto project valuation metric, let's now relate this to a hot topic surrounding many of today's popular crypto projects.

The fear of token unlocks for high FDV, low float crypto projects

As mentioned by Framework Ventures co-founder Vance Spencer, this seems to be the first crypto cycle where crypto traders are beginning to realize the pitfalls of token unlocks. For those new to the world of crypto trading, token unlocks refer to a previously locked or restricted portion of a project's total token supply that becomes available for trading and enters the circulating supply. This can significantly impact a project's price dynamics, particularly for projects with high FDV and low float as the increase in supply without an equal amount of demand from those going long will likely cause near-term price volatility to the downside.

The awareness of said vesting periods introduces a new variant to the pricing dynamics of a crypto project as savvy crypto traders anticipate an increase in token supply and proceed to mitigate their risk and exposure ahead of this catalyst. This typically results in them dumping their holdings as they expect price declines once these locked tokens come into circulation, as a surge in supply without equal increases in demand could lead to short-term price declines. Additionally, crypto traders with a shorter time horizon will feel incentivized to exit their positions to lock in gains, further contributing to sudden price dumps.

How increasing ARB's circulating supply by 76% contributed to a crash

Arbitrum price action
Source: Trading View

To better understand the impact of huge token unlocks on crypto projects, one recent example would be the recent Arbitrum token unlock. According to Cryptorank, 1.11 billion ARB tokens were unlocked on March 16, 2024 as a result of vesting periods coming to an end. This would be the equivalent of cliff vesting among shareholders in a company. At the time, these 1.11 billion ARB tokens represented 76% of the circulating supply, nearly doubling the amount of ARB available for trade on the market. With such numbers in mind, it's no wonder some ARB holders decided to sell ahead of the catalyst.

As you can see from the ARB chart above, ARB's price suffered a significant dip ahead of the massive token unlock event. Prices consolidated at the $1.80 to $2 range before finally succumbing to bearish momentum. Once these 1.11 billion ARB tokens were finally unlocked, ARB prices dipped by more than 50% as ARB suffered a series of selloffs. Even though this can be directly attributed to a whole host of factors that include ETH's previous underperformance, it's undeniable that the fear of a big increase in the float caused immense downside pressure as Relative Strength Index levels reached oversold and a death cross began to form.

Although the long-term impact of token unlocks remains to be seen and Arbitrum's strong project fundamentals as an integral Layer-2 for Ethereum could still outweigh these short-term pressures, it's safe to say that the damage has been done amid ARB HODLers who chose to hold through the token unlock event. Based on the OKLink ETH explorer for Arbitrum, it currently has a Total Value Locked of about $1 billion when taking into account mainstream projects on the network. This effectively puts it among the top ten when compared against other blockchain networks, which reflects the overall health and potential of the Arbitrum network for the long haul.

What the data says about high FDV crypto projects

FDV Dune chart
Source: Dune

Diving into high FDV crypto projects, @dyorcrypto has collated a venture capital (VC) printer dashboard that keeps retail traders well-informed about possible future dumps. As the data suggests, there seems to be a correlation between high FDV crypto projects with upcoming token unlocks and price declines. This phenomenon can be attributed to two key factors, namely anticipatory selling and the domino effect that arises from panic selling.

Crypto traders trading on a short-term time frame might choose to sell their holdings before the token unlock event in anticipation of a price drop due to the increased supply entering circulation. This pre-emptive selling can trigger a downward spiral, which can snowball into a broader sell-off as other crypto traders panic in view of the short-term price dips. Such fear-driven selling can exacerbate the price decline, creating a self-fulfilling prophecy of an overall crash and falling confidence in the long-term growth of the project.

A look at the bigger picture behind token unlocks as a singular data source

It's easy to point at aggressive token unlocks and blame it for the failure of some crypto projects. However, a more nuanced analysis is necessary. Here's why the data might not paint the whole picture:

  • Limited timeframe: The data might only capture a specific timeframe within a single crypto cycle. Long-term price trends and project fundamentals might not be reflected.

  • Distinguishing between correlation and causation: Just because price declines occur before token unlocks doesn't necessarily mean the unlocks are the sole cause. Other market factors or project-specific news could be influencing the price. As previously highlighted, ARB's token unlock alone isn't to blame for its dip in price as other factors like uncertainty around the spot ETH ETF could've been a contributing reason for ARB's underperformance.

  • Not all unlocks are created equal: The impact of token unlocks depends on various factors. A project with a strong roadmap and a well-distributed token release schedule might experience less severe price fluctuations compared to a project with a high concentration of tokens unlocked at once.

Same FDV story, different timeline?

The current enthusiasm surrounding high FDV VC-backed projects sparks a sense of déjà vu for some crypto veterans. The narrative around potential and future growth fueled by high FDV metrics seems eerily similar to the hype witnessed during previous bull market cycles. Popular projects like Filecoin (FIL), Internet Computer (ICP), and Serum (SRM) achieved dizzying highs after capturing the crypto community's attention with their high FDV, leading to significant price surges. However, these gains proved unsustainable as bearish sentiment returned, and the projects experienced dramatic price corrections.

Has the broader crypto community learned its lesson? While some may argue that this time is different because the crypto ecosystem has matured significantly since the last bull run and projects are now competing in a more crowded space, traders these days do expect tangible results and a clear path to adoption before committing to a long-term hold. As such, we're seeing funds float towards VC-supported projects with lofty ambitions of revolutionizing the crypto scene with trending bull market narratives like DePIN and RWA. Although such projects sound flashy and tap into current market trends, it's ultimately unknown whether they can live up to the hype.

Is FDV a meme? A cautionary tale about bull market euphoria

With VC-backed crypto projects popping up left and right these days, it ultimately begs the question — is FDV a meme? The allure of high FDV projects is attractive, particularly during bull markets fueled by excitement and hype, as these shiny new projects initially attract crypto traders for two key reasons.

First, a high FDV can suggest significant room for future growth. Traders seeking high returns are drawn to the narrative that paints a picture of widespread adoption and a future market cap that justifies the high FDV. Said growth projections can work especially well since traders tend to have a more risk-on approach during bull runs. Second, a low circulating supply combined with a high FDV creates an illusion of scarcity, driving up the price per token. Crypto traders that favor such tokenomics might perceive this as favorable, with the potential to appreciate significantly given the scarcity involved.

However, as the data suggests, the euphoria surrounding high FDV projects can be short-lived. These projects can possibly backfire in several ways. As vesting schedules end and locked tokens become available for trading, a flood of new supply enters the market. This increased supply can overwhelm demand, leading to a price decline. The initial excitement surrounding "forced scarcity" evaporates as the token becomes readily available.

Furthermore, many high FDV projects rely heavily on hype and a compelling narrative rather than tangible utility or strong fundamentals. Once the initial excitement fades and the project fails to deliver on its promises, long-term holder confidence wanes, further fueling the price decline. As such, rather than being a crypto meme, FDV does indeed raise genuine concerns about the sustainability of such tokenomics and valuations in light of potential future token unlocks and the project's ability to deliver on its long-term vision.

Final words and next steps

The cautionary tale of trading unreasonably high FDV and low float projects highlights the crucial point of FDV being just one piece of the puzzle when evaluating crypto projects. While the concerns raised are justified, crypto traders will need a more comprehensive assessment to evaluate a project's true long-term potential. From analyzing token distribution plans to understanding the project's long-term roadmap, it takes a whole lot of due diligence and doing your own research to understand the potential impact of future token unlocks on price. By adopting a cautious and analytical approach, traders can avoid getting swept up in the hype of high FDV projects and make more informed decisions about their cryptocurrency trades.

FAQs

What is Fully Diluted Valuation?

FDV refers to the total theoretical market capitalization of a cryptocurrency project, based on all tokens, not just those in circulation.

Isn't a higher FDV always better?

Not necessarily. A high FDV can point to a project with an excessive token supply, potentially leading to market saturation and a decrease in price per coin/token. Focus on the project's fundamentals and how it plans to use its token supply effectively.

Should I completely ignore FDV?

No, FDV can provide a glimpse into a project's potential future market size. However, you shouldn't base your trading decisions solely on FDV. Use it as one data point among many in your overall research process.

Is it safe to trade tokens with a high FDV and low market cap?

These projects can be riskier as they rely heavily on future token issuance to reach their FDV potential. Trade cautiously and prioritize projects with a strong foundation, real-world use cases, and a growing user base.

How do token lockups affect FDV?

Locked tokens aren't included in circulating supply but are factored into FDV. As lockup periods end, these tokens become available for trading, potentially increasing circulating supply and impacting price.

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