TL;DR: FDV, or Fully Diluted Valuation, is calculated by multiplying the total number of tokens that will ever exist (the maximum supply) by the current price of each token.
FDV, or Fully Diluted Valuation, in the cryptocurrency world is a crucial metric for understanding the potential market capitalization of a digital asset. It's calculated by multiplying the total maximum supply of tokens by their current market price. This gives investors and analysts an idea of what the market cap would be if all future tokens were in circulation.
For instance, if a cryptocurrency has a maximum supply of 1 million tokens and each is priced at $10, the FDV would be $10 million.
Examples of FDV Calculations:
- Bitcoin (BTC):
Maximum Supply: 21 million BTC
Current Price: $47,000 per BTC
FDV: 21,000,000 BTC × $47,000 = $987 billion
- Ethereum (ETH):
Ethereum's FDV calculation is not applicable, as it does not have a fixed maximum supply.
- Sushi (SUSHI):
Hypothetical Maximum Supply: 250 million SUSHI
Current Price: $1 per SUSHI
FDV: 250,000,000 SUSHI × $1 = $250 million
FDV offers insight into a cryptocurrency's potential market size, particularly useful for tokens with a significant portion of their supply not yet in circulation. However, it's a theoretical metric and may not always accurately predict future market conditions, given the volatile nature of the crypto market.
Beyond FDV: Alternative Metrics for Crypto Valuation
In cases like Ethereum, where FDV cannot be traditionally calculated, investors may look towards other metrics. Ryan Adams of Bankless in a tweet used the P/E (Price-to-Earnings) ratio, a concept borrowed from traditional finance, to prove the potential value of Ethereum. He points out that Ethereum generates $2.7 billion in annualized profits, proposing a P/E ratio to measure the value of Ethereum. The P/E ratio provides a snapshot of profitability and market expectations, offering a different perspective from the forward-looking FDV.
For example, comparing Ethereum's P/E ratio to that of established companies like Amazon or Zoom gives a sense of its financial performance relative to its price. This approach might be more relevant for investors seeking a blend of traditional financial analysis and the unique aspects of crypto assets.
What’s the best metric?
While Fully Diluted Valuation (FDV) is a key tool for crypto investors, integrating it with other metrics like the Price-to-Earnings (P/E) ratio is crucial. FDV, affected directly by a token's current market value, is a hypothetical figure based on the assumption of full token circulation - a condition that might not be current or ever fully realized. This underlines the importance of interpreting FDV with caution, as it represents a projected market cap under specific conditions rather than a real-time valuation.
This holistic approach can provide a more comprehensive understanding of a cryptocurrency's value and potential, especially in a market as dynamic and unpredictable as the crypto market.
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