Understanding Fully Diluted Valuation: Definition & Calculation

Understanding Market Capitalization and Fully Diluted Value

In the dynamic world of cryptocurrency, it's easy to get caught up in the excitement of the latest trending coin. However, a more reliable approach to evaluating potential investments lies in understanding market capitalization and fully diluted value. These metrics provide crucial insights into coin valuations and serve as a better foundation for making informed decisions.

Market capitalization (MC) and fully diluted value (FDV) are fundamental indicators of cryptocurrency value, helping investors assess the size and potential growth of a coin.

Let's start with the core definitions:

Market Cap (MC) is the total value of all mined coins, calculated by multiplying the number of coins in circulation by the current market price of a single coin.

Fully Diluted Valuation (FDV) expresses the total value of a project by multiplying the current token price by the total number of tokens (both in circulation and in the future).

Analyzing the FDV:Market Value Ratio

In cryptocurrency investing, it is particularly important to analyze FDV, especially when comparing it to market capitalization. A high FDV:Market Cap ratio indicates that there are a large number of tokens yet to enter circulation, which could significantly dilute the value for existing holders.

For instance, a 200:1 FDV:Market Cap ratio means that once all tokens are unlocked, the market will need a huge buying pressure to maintain the current price. If the buying pressure remains constant, the price could fall significantly.

A prominent project once had an FDV:market cap ratio of 200, with an FDV of $30.3 billion and a market cap of $151.6 million. Such a high ratio suggests that if the token is unlocked, the price will likely be severely affected unless demand increases significantly. This situation would also further increase selling pressure as early investors sell off their stakes.

Investors have become cautious about projects with low circulation and high FDV, preferring tokens with a 1:1 market cap/FDV ratio. These tokens may rise in price in the short term, but without widespread adoption and sustained new buying interest, their prices tend to fall in the long term. Therefore, careful analysis of FDV relative to market cap is critical to making informed investment decisions.

Analysis by Market Capitalization Level

Market capitalization levels can provide valuable insights into a coin's potential and stability. Low market cap coins (below $100M) generally offer higher risk with higher reward potential. Medium market cap coins ($100M - $1B) present a balanced risk-reward profile, while high market cap coins (above $1B) typically have lower risk but also lower growth potential.

Most coins tend to disappear quickly, but identifying a hyped coin when its market cap is around $100 million can lead to lucrative opportunities as it has the potential to soar to $1 billion. For example, a coin moving from $1 million to $100 million market cap could yield a 100x return, while growth from $200 million to $1 billion would result in a 5x return, and from $1 billion to $10 billion a 10x return.

'Sweet Spot'

If you're looking for explosive opportunities, you might want to focus on the mid-cap area with market caps between $50 million and $100 million. Within this range, coins are mature enough to reach high eight-digit market caps, but still have significant upside potential. Prices for these coins are relatively good, so you can get a good position.

Currency Analysis

Let's analyze some coins to illustrate these concepts.

Analyzing Toncoin

Toncoin (TON) is currently a hot topic in the cryptocurrency space. Let's compare TON and another prominent blockchain platform.

Currently, TON would need to grow 3x from now to reach its competitor's current levels. TON's FDV:MC ratio is relatively good at around 1.47, indicating good growth potential. However, to determine if it can reach its competitor's levels, we need to look at the utility of the chain.

A comparison of TON's and its competitor's DeFi TVL shows that TON's current TVL is a fraction of its competitor's. While this number can and will grow, it remains to be seen if it will reach the competitor's levels. The FDV:MC ratio suggests that supply isn't getting out of control.

Even if TON reaches the psychological level of $10, its market cap will be around $35 billion. To exceed $50 billion, TON will need substantial utility and significant DeFi development.

Analyze SAFE

SAFE has gained attention from sophisticated investors following its unlock. The current market capitalization is approximately $985 million, with a fully diluted valuation of approximately $2.3 billion. The ratio of fully diluted valuation to market capitalization is approximately 2.325. While not ideal, it's not out of control either. The number of sophisticated investor addresses holding SAFE has increased significantly.

The market cap is still below $1 billion, indicating significant upside potential. Additionally, SAFE is down 35% from its all-time high set less than a month ago. We believe the coin's realistic market cap level is somewhere between $3 billion and $5 billion, assuming demand for SAFE tokens is high enough to break through the $3 resistance level.

Analysis of Sophisticated Investor Mid-Cap Market Cap

Let's apply what we've learned to analyze mid-cap coins that have attracted at least $1 million in trades from sophisticated investors in the past 7 days:

GROK

GROK is a leading mid-cap coin heavily traded by sophisticated investors, with an impressive FDV:MC ratio of 1.04. Its favorable ratio highlights why investors favor such assets. GROK is currently trading about 60% below its all-time high, indicating significant growth potential.

THE BAD

THE BAD also has a close to 1:1 FDV:MC ratio at 1.053. It's capitalizing on the recent token standard craze. The project's developers are expanding the compatibility of their cross-chain bridge to support additional asset types and developing more farming strategies. This activity has caught the attention of sophisticated investors, potentially signaling an opportunity.

Understanding the ideal FDV:MC ratio is crucial for making informed investment decisions in the cryptocurrency market.