FDV is a Meme, Most people don't understand what is the Full Diluted Valuation (FDV) in crypto. They are making wrong investment decision based on low or high FDV.
Let's me explain
To understand FDV we need to start with the basics of tokenomy.
- Demand & Supply => Price: Changes in price are caused by the demand and supply forces.
- Demand⬇️ OR Supply⬆️ => Price⬇️
- Demand⬆️ OR Supply⬇️ => Price ⬆️
- Supply: We have 2 main supply metrics:
- Circulating Supply: Number of available tokens on the market
- Max Supply: Theoretical max token amount
- Valuation: By multiplying the price by supply we get the token's Market Cap (MC)
- MC = Circulating Supply * Price
- FDV = Max Supply * Price
- High FDV: Many people are concerned when:
- FDV >> MC: This means that in the future more tokens will be available (higher Circulating Supply) which will have an impact on the price, because:
- Supply⬆️ => Price⬇️
- New tokens: These tokens can be available as a part of the vesting schedule and released to early investors. In this case, our number of tokens will be diluted, because we will have more of them on the market.
We will use them to calculate Market Capitalization.
Is high FDV bad for investors?
- Price: As said, price is affected by two forces:
- Demand & Supply => Price: so to evaluate the impact on the price, we will have to check how the demand for a token is changing.
- Demand vs Supply: New tokens will be released after some time. During this period we can also have changes in demand and 3 different price effects:
- Supply⬆️ & Demand⬇️ => Price⬇️
- Supply⬆️ & Demand⬆️ => Price❔
- Supply⬆️ & Demand⬆️⬆️ => Price⬆️
This is the most common scenario, especially with farm tokens.
I wrote a thread explaining this mechanism. This is also the main reason why sometimes we have incredible high APY in DeFi
- Price⬆️: Some projects are able to deliver more value over this. This increases demand for a token and caused its price. The perfect example of it is... $BTC. Every year we have more Bitcoins and more people want to but it. Price is rising.
- Price❔: For many projects we don't know if high supply will be mitigated by even higher demand. As a rule of thumb assume that for most of the projects with high FDV, we will see lower prices over time.