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The Great Dilution Dilemma: Why Fully Diluted Valuation (FDV) Can Make or Break Your Crypto Investment
Fully diluted valuation (FDV) is a measure of the value of a company if all outstanding securities, such as options, warrants, and convertible debt, were converted into shares. This represents the maximum value a company could reach, including all potential future equity that could be issued.
By: Flagship Team
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Assessing the Fully Diluted Valuation
They often used Fully Diluted Valuation as a benchmark for the value of a company and is usually higher than the company’s current market cap, which is the company’s value based on the current price of its outstanding shares.
In cryptocurrency and blockchain projects, FDV is an essential metric for investors to consider when evaluating the risks associated with a particular project. A high FDV to market cap ratio can indicate a potential for significant dilution in the future, as the release of additional tokens may lead to supply inflation and downward pressure on the value of the tokens.
The Impact of Locked-up Tokens on Token Value
Projects can mitigate the risk of dilution by releasing a more significant percentage of their total token supply at launch rather than relying on vesting schedules or reserving tokens for future use. This can help to prevent inflation and sell-side pressure in the long term, making the project more attractive to value-oriented investors. For example, some of the most successful early cryptocurrency and blockchain projects, such as Ethereum, Binance Coin, and Cardano, sold a large portion of their initial total supply to investors, helping prevent inflation from negatively impacting the value of the tokens.
However, in recent years, it has become more common for projects to only release a small percentage of their tokens at launch, with the remainder locked up in vesting schedules or reserved for future use. This can lead to significant supply inflation as these locked-up tokens are gradually released over time, which can put downward pressure on the value of the tokens. For example, some projects may conduct different sell rounds for venture capitalists and institutional investors, with vesting periods to ensure that these investors only dump some of their coins after the project goes public for trading. However, if the coin stays in the market long enough to complete the vesting period for these investors and its circulating supply is still high, they may choose to sell their tokens, causing the price to drop significantly.
Key Metrics for Evaluating Cryptocurrency Projects
It is crucial for investors to carefully consider the fully diluted valuation of a project before making an investment decision, as a high FDV relative to market cap can indicate a potential for significant dilution in the future. It is also essential to thoroughly research and understand the vesting schedules and other factors that may impact project tokens' supply. This can help inform an investor’s decision about the project’s long-term prospects. By considering FDV and other vital metrics, investors can make more informed decisions about which projects will likely provide the best long-term returns.
In addition to FDV, there are several other important factors that investors should consider when evaluating the risks and potential returns of a cryptocurrency or blockchain project. These may include the project’s market capitalization, liquidity, the level of demand for its tokens, and the overall competition within its market. Investors should also carefully research the team behind the project, as a strong team with relevant experience and expertise can be an essential indicator of a project’s potential success.It is also crucial for investors to be aware of the potential risks associated with investing in cryptocurrency and blockchain projects, as these markets can be highly volatile, and there is always the risk of losses. Some key risks to consider include regulatory uncertainty, technological risks, and the possibility of fraud or market manipulation. Investors should be prepared to carefully assess these risks and make informed decisions about whether the potential rewards of investing in a particular project outweigh the potential risks.
Factors That Can Increase Fully Diluted Valuation (FDV) Relative to Market Cap
Moreover, are you still wondering how or even why the FDV may be significantly higher than market cap? Here are ten reasons in point form how this could happen:
- Vesting schedules: Many cryptocurrency and blockchain projects use vesting schedules to release tokens to investors over time. If a large portion of the total token supply is subject to a vesting schedule, this can lead to FDV being significantly higher than market cap, as the total value of the tokens has yet to be realized.
- Future equity: FDV includes the potential value of all future equity that could be issued, such as options, warrants, and convertible debt. If a company has issued a large amount of future equity, this can significantly increase FDV relative to mcap.
- Reserve tokens: Some projects may reserve a portion of their total token supply for future use, such as for ecosystem rewards or fundraising rounds. This can also lead to FDV being significantly higher than mcap.
- Token generation events: If a project conducts multiple token generation events, such as initial coin offerings (ICOs) or initial decentralized exchange listings (IDOs), this can lead to a large portion of the total token supply being reserved for future release, resulting in FDV being significantly higher than mcap.
- Token burns: Some projects may choose to “burn” tokens, which means permanently destroying them and reducing the total supply. This can lead to FDV being lower than mcap, as the value of the remaining tokens may increase due to reduced supply.
- Token buybacks: Some projects may buy back and destroy a portion of their tokens to increase the value of the remaining tokens. This can also lead to FDV being lower than mcap.
- Token swaps: If a project conducts a token swap, where old tokens are exchanged for new ones, this can lead to FDV being significantly different from mcap.
- Market conditions: The market value of a cryptocurrency or blockchain project can be highly volatile and subject to significant fluctuations. If the market value of a project decreases significantly, this can lead to FDV being substantially higher than mcap. Conversely, if the market value of a project increases significantly, FDV may be lower than mcap.
- Token distribution: The distribution of tokens within a project can also impact the relationship between FDV and mcap. For example, suppose a small number of large investors holds a large portion of the total token supply. In that case, this can lead to FDV being significantly higher than mcap, as the value of the remaining tokens may be diluted.
- Token utility: The utility of a project’s tokens, or the extent to which they are used and accepted within the project’s ecosystem, can also impact the relationship between FDV and mcap. If a project’s tokens have a high level of utility and are widely used, this can lead to a higher market value and a lower FDV relative to mcap. Conversely, if a project’s tokens have low utility and are not widely used, this can lead to a lower market value and a higher FDV relative to mcap.
Navigating the Great Dilution Dilemma in Crypto Investments
Overall, fully diluted valuation is an essential metric for investors to consider when evaluating the risks and potential returns of a cryptocurrency or blockchain project. By carefully considering FDV and other vital metrics, investors can make more informed decisions about which projects will likely provide the best long-term returns.
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