The market cap would be fully diluted if the entire maximum quantity of tokens were in use. But why does that matter now, particularly given the bear market?
The STEPN coin was devoured alive by the bear market and by its fully diluted market cap, also known as fully diluted value, despite being founded on an innovative idea with a sizable user base (FDV). However, what is FDV and why is it so crucial? Why does a market cap that is fully diluted matter more in a bear market? In this article, we examine:
Market cap versus fully diluted market cap,
Why market cap is so significant when completely diluted,
How to trade Fully diluted market caps
How Do Market Cap and Fully Diluted Market Cap Differ?
Fully Diluted Market Cap
Maximum supply x The price of a coin today
Capitalization of the Market
This is the definition of the market cap. (NOT fully diluted):Circulating supply times the price of the coin today
19 million (rounded) x $19,169= $364 billion
161 million(rounded) x $275= $44.275 billion.
The market cap (not fully diluted) considers the supply of tokens that are currently in circulation. The maximum supply of tokens is what the fully diluted market considers to be available. Undiluted and fully diluted market capitalizations of Bitcoin differ by $40 billion! In other words, BTC emissions are still coming at a cost of more than $40 billion (at today’s pricing).
Keep in mind that some cryptocurrencies, like ETH, don’t have a set quantity of tokens. They may be deflationary or even inflationary, both of which may have benefits and drawbacks.
Justification for Fully Diluted Market Cap
Utilizing fully diluted market cap is advantageous for the following three reasons:
To evaluate the fair value and valuation of a project both before and after launch.
In order to assess its emissions and possible selling pressure.
To ascertain the team’s and the market’s opinion on the project.
Let’s take a closer look at them.
Evaluation of a Project’s Value
Assume for a moment that a non-fungible token (NFT) and metaverse project will introduce a coin that resembles ApeCoin (APE). The market settles on a completely diluted market cap of $10 billion when the token releases. The FDV of APE at the time of writing ($5.6 billion) is more than double that amount.
Do you think the price is reasonable or excessive?
The answer depends on a number of variables, including the project’s roadmap, the state of the market, and the token usefulness and tokenomics.
As a result, you may determine a new project’s fair worth by evaluating its fully diluted value in comparison to that of its rivals. You should determine whether it is overvalued or justified if it is several multiples more than the market average. If it is much less, you should investigate the reason for the FDV’s low value and determine whether the project might be a hidden gem.
Understanding a Project’s Emissions
Token emissions are key to understanding fully diluted market cap. If a token has a lot of outstanding token emissions and its FDV is significantly higher than its current market cap, the token may likely be under constant selling pressure, as early investors take profits when vested tokens unlock in the future. Conversely, low token emissions may mean there won’t be a lot of selling pressure in the future.
Similar to this, recognizing when an FDV is excessive might reveal profitable short- and long-term bets. For instance, STEPN reached its high with a fully diluted market cap of over $20 billion. The value of an established video game juggernaut like Electronic Arts is more than halved at that point.
For instance, the STEPN coin still has more than 90% of its emissions outstanding. This indicates that there will be ongoing selling pressure on the token.
The emission schedule and token utility should take into consideration. There will be less selling pressure on a token that has a high utility, like a gas token. The team has time to develop the project and expand its market share thanks to an emissions schedule spread over a number of years.
Team and Market Sentiment Analysis
Retailers frequently ask:
Is it beneficial or bad to have a large completely diluted market cap?
The reply is, “It depends.”
If a team selects a high FDV, it’s not necessarily bad. A high FDV can indicate a team feels optimistic about the chances of their project, depending on how serious the project is.
The squad may be attempting to take advantage of positive emotions, though. For example, numerous projects debuted with a high FDV at the height of the play-to-earn craze in November 2021 in an effort to ride the wave of free money. Despite still having more than 80% of its tokens to come, the play-to-earn game Crabada on Avalanche has lost more than 99% of its worth.
Liquidity is easy to find and follows the hottest trend in bull markets. Investors focus much more on “fundamentals” during bear markets and tend to dump tokens with a high level of outstanding inflation.
A Guide to Trade Fully Diluted Market Caps
Three helpful guidelines for trading fully diluted market caps are as follows:
Considering the initial estimate and contrasting it with competition
Recognizing our position in the market cycle
Recognizing narratives and FUD instances
The FDV of a new token should compared with that of its rivals first. Is it significantly lower or higher? Why, if so? Why might that be acceptable? The market may be enthusiastic since the token is a part of a recent trend called “move to earn.” Or perhaps a less- used blockchain is chosen for the project’s debut. A project is not made or broken by having a high FDV at the outset. But it aids in determining the positioning of the team and the mood of the market.
Second, it’s crucial to recognize whether you are late or early in a cycle and a narrative. Cycles in crypto are quite brief. In the summer of 2021, when the market was extremely bullish, DeFi was the trending topic. The market was in peak in April 2021, but DeFi’s role as a sector narrative had already been established, and the focus had shifted to play-to-earn and NFTs. As demonstrated by the move-to-earn example at the beginning of 2022, narratives can even emerge during bear markets. If a token has an excessively inflated FDV, they are frequently substantially shorter and present strong opportunities for shorting.
The market allegedly reacted to a joke made by Chamath Palihapitiya, a venture capital (VC) investor in Solana, about dumping his SOL on retail investors. If a project has issues or the market is negative, FUD surrounding totally diluted values is crucial. Bullish markets allow even initiatives with weak fundamentals to value higher thanks to effective marketing.
Learning to read a white paper and paying attention to tokenomics are the greatest ways to spot FUD.
Another weapon that every trader should have in their toolbox is fully diluted market cap. It can aid you in identifying profitable trading chances in the markets, but it is frequently not essential to a project’s success.
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