Fully Diluted Valuation (FDV) — The Great Dilution Dilemma

Fully Diluted Valuation (FDV) — The Great Dilution Dilemma

Created 3mo ago, last updated 3mo ago

Fully diluted valuation is the total market capitalization if all tokens are in circulation. A high FDV relative to MCAP may lead to significant supply inflation and sell-side pressure.

Fully Diluted Valuation (FDV) — The Great Dilution Dilemma

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If you’ve invested in a blockchain project in recent months, odds are the asset you’ve invested in has a fully diluted valuation significantly larger than its current market capitalization — which often doesn’t bode well long term.

In other words, these projects usually have just a small fraction of their total supply in circulation at any one time due to investor vesting, ecosystem rewards, staged airdrops, etc, which act to dramatically increase their circulating supply with time.

Initial Token Launch of Early Projects

This, however, wasn’t always the case, since many 2014-2017 era giants generally launched with a large fraction of their supply in circulation, and experienced relatively low inflation over time.

Taking a look at the top the three largest market cap projects that initially held an ICO or similar fundraising offering,
  • Ethereum (ETH): In July 2014, Ethereum held its ICO and raised approximately $18.3 million worth of Bitcoin. In total, more than 60 million ETH was sold, equivalent to more than 80% of its initial circulating supply. In the almost 8 years since it launched, its supply has almost doubled — which can be considered a reasonable inflation rate by modern standards.
  • Binance Coin (BNB): Binance Coin will go down in history as one of the most lucrative investments ever, providing ICO participants with as much as 3 million percent profit at its peak. In the July 2017 ICO, Binance offered up a total of 60% of the token supply (10% for angel investors and 50% for a public sale). Binance raised a total of $15 million in its sale, selling a total of 60 million BNB.
  • Cardano (ADA): One of the largest ICOs of all time, Cardano raised a total of $62.2 million in December 2016 by selling 57.6% of the token supply. The value of ADA has now multiplied 400 fold compared to its $0.0024 ICO price and reached more than 1.2 million percent profit for ICO participants at its peak value.
What do all of these projects have in common (besides being smart contract platforms)? They all sold a large chunk of their initial total supply to investors, ensuring that inflation wouldn’t cripple them later down the road.
Click here to learn more about token supplies.
This same trend is seen in many of the largest blockchain projects that were supported by an ICO/IDO, including The Graph, Elrond and Enjin — each of which sold at least one-third of its total supply to investors and successfully withstood the negative effects of inflation.

Fully Diluted Valuation in Projects Today

Comparatively, this is rarely the case today. Instead, most new blockchain projects sell a tiny fraction of the total supply to investors and/or rely on extreme vesting schedules, which see investor tokens gradually unlocked over time — typically resulting in massive supply inflation and a subsequent collapse in value.
This is typically the case when projects have a very low initial market capitalization at its token generation event (TGE). These projects almost always release just a tiny fraction of their token supply at launch, before rapidly inflating in the weeks and months ahead as vested tokens unlock.

Take the following projects as an example:

  • DoragonLand: This play-to-earn game sold a total of 16.5% of its token supply across its private/pre-sale and public sale rounds — with highly inflative tokenomics. As a result of massive inflation and limited demand, the DOR token is now ROI negative for private sale and IDO participants and is down 95% from its all-time high.
  • Tryhards: Despite selling a total of 36% of its token supply, TryHards's has an extremely inflative vesting schedule and released just a fraction of investor tokens at TGE. As a result, its supply has inflated massively since launch, collapsing its value. As it stands, significant inflation in the token supply has sent the price tumbling below its IDO, private, and strategic sale price, leaving investors in a potentially significant loss

An example of a highly inflative vesting schedule. (Image: Tryhards).

As you might notice, we chose two recent play-to-earn games to illustrate this point. Though many P2E games manage to garner significant attention and adoption, most do not, and often end up being flattened by runaway inflation.

The Importance of Fully Diluted Valuation

Right now, the vast majority of newly launched blockchain projects aim to go to market with a low market capitalization to make them more attractive to investors. For example, you might have a project launch with an initial market cap of $100,000, but a project valuation of $10 million — which means investors could expect a 100x multiplier at TGE if this valuation accurately gauged secondary market demand.

But in order to develop and market a successful product, most projects need to raise a significant sum, usually measured in the multiple millions of dollars for even less ambitious projects. To help marry the two — both raising significant funds and launching with a low market cap to stimulate secondary market demand — projects usually enforce strict vesting schedules on investors. This inevitably leads to significant inflation and sell-side pressure, unless coupled with working burn mechanics.
Because of this, it’s important for investors to consider the fully diluted valuation (FDV) of a project before investing. This is its total market capitalization if all tokens were in circulation, and is calculated as total supply * current market price = FDV. If this value is significantly higher than its current market capitalization and the project has highly inflative tokenomics, then odds are sell-side pressure is set to dramatically increase.
Alternatively, you can easily check the FDV of most projects on their coin profile page:

Now, this isn’t always a death sentence for the project. In rare cases, it’s possible for buy-side demand to compensate for its rapidly growing token supply, and the token value is still able to grow. This is uncommon, however.

Likewise, it is a common misconception that tokens generally will not fall below the lowest possible price that investors paid during its earliest token sale rounds — such as the angel, seed, or pre-sale rounds. This is far from accurate. Due to a lack of liquidity on decentralized exchanges, combined with an abundance of ‘free’ tokens (i.e. those from airdrops, giveaways, ecosystem rewards, etc.) it is very possible for even the earliest investors to lose money by the end of their vesting period.

These factors should always be considered when investing in any project, particularly when it’s for the long haul.

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