The two most important and popular factors when valuing a coin/token are Market Cap (MC) and Fully Diluted Valuation (FDV). In today's article, I will share important notes you need to know when using MC and FDV in token valuation and most importantly, you will know how to choose the right time to invest in coins.
1. Overview
Although both of these indicators are quite similar in value, they represent two different levels of meaning. Below is a “lens” of the difference between Market Cap and Fully Diluted Valuation.
What is Market Cap?
Market Cap (MC) is market capitalization value, used to refer to the total value of a project's tokens circulating on the market.
Marketcap = number of tokens in circulation * current price of token
Number of tokens in circulation = total supply - number of locked tokens - number of burned tokens MC reflects the number of tokens circulating in the market, who is holding the tokens? If the team is a large holder and the MC is small, it will be easier to push up the token price.
What is FDV?
FDV is the market capitalization value of the token/coin when the token supply reaches its maximum.
FDV = maximum supply * current price of token
FDV is the total project value that investors are willing to pay when investing in that project.
2. Correlation between FDV and MC
If MC is low, FDV is high -> it means there are a lot of tokens left in circulation -> you need to pay attention to the issue of token inflation
If MC is approximately as high as FDV -> at this point you don't need to worry too much about token inflation pressure
To make it easier to understand, I will explain through the following example: A project has a very small MC, about $1M, but only 1% of the tokens in circulation => Project FDV is up to $100M.
This is the reason why some good projects have low MC but are very difficult to xxx in the long term because the discharge pressure is huge when NEW tokens are continuously pumped into the market (Demand does not increase, or increases very little, but Supply increases). Massive)
When investing under MC or FDV, you need to research to clearly understand the project's token unlocking schedule and then plan for effective investment. In the case of BTC, over a decade of existence, 90% of the total supply has been mined and is in circulation.
The supply of BTC is fixed at 21 million and the Halving mechanism ensures that every 4 years, the amount of Bitcoin issued at each new Block will be halved, helping to reduce inflation. And when supply does not increase as fast as demand, it will push BTC prices up.
3. Some tips to help invest effectively under FDV
First of all, you need to analyze the basic project carefully including factors such as products, teams, investors,... and then consider the analysis and investment step according to FDV. Because if the basic analysis information of the project is not good, the analysis based on FDV is meaningless. Here I will consider the case where the basic analytical information of that project is good.
Compare FDV between projects in the same niche
FDV is much smaller -> this is a good signal to invest in that project.
For example, for Layer 1 projects, the current FDV is quite large, from hundreds of millions to several billion dollars. If the project has all the basic elements, but the FDV is small, this can be considered a reasonable FDV. Can consider buying.
Compare the project's FDV with the general market
Most of the projects in the top 500 FDV are from $1-200M or more. If the project is below FDV about $10M - $20M, this is also a pretty good signal as the project may be undervalued.
Compare FDV with previous funding rounds
A typical case is the Connext Network project, the last round of project funding was valued at $250M. After the token airdrop to investors and token listing, the price of the token dropped sharply, resulting in the project's FDV being only about $28M.
Compare the FDV correlation between the most recent capital raising round ($250M) and the token launch ($28M) -> FDV has been divided about 9 times. According to the principle when investing, investors will tend to support the project so that the project can achieve the FDV level they invested in to get back their capital.
=> This can be a good signal to buy when the current FDV compared to the FDV of the capital call is very small.