The fully diluted market cap represents the total market value of a cryptocurrency if all its tokens were in circulation. It’s an important metric in crypto investing as it helps you analyze the potential impact of future token releases on the price of the cryptocurrency you want to buy. Here is all you need to know.
What Is Market Cap?
Market cap (market capitalization) measures a cryptocurrency’s total value. It is calculated by multiplying the current price of one token by the total circulating supply of tokens.
This metric helps determine a cryptocurrency’s size and relative importance in the market, which is an essential factor in determining whether a crypto project is valuable, viable, and trustworthy.
A higher market cap can suggest that a cryptocurrency project is more established and widely adopted, but it doesn’t necessarily mean it is more reliable.
While market cap is a helpful indicator of a project’s size and influence in the market, reliability depends on several other factors, including technology, development, roadmap, adoption, community support, use cases, etc.
The market cap comprises three main types.
Types of Market Cap
Mega-cap, large-cap, and mid-cap are three main types of market cap. Let’s learn about them and see how they differ.
Mega Cap
Mega Cap refers to cryptocurrencies with very large market capitalizations, usually over $200 billion. Examples include Bitcoin (BTC) and Ethereum (ETH), well-established coins considered less volatile and often viewed as safer investments.
Large Cap
Large-cap cryptocurrencies have market caps between $10 billion and $200 billion. These coins are generally more stable but still have growth potential. Examples include Binance Coin (BNB) and Cardano (ADA).
Mid Cap
Mid-Cap cryptocurrencies generally have a market cap between $1 billion and $10 billion. These projects have solid market traction and potential for growth, but they can also be more volatile. Examples include Chainlink (LINK) and Polkadot (DOT).
Another important factor worth considering when choosing a proper cryptocurrency for investment is “fully diluted market cap”.
What Is a Fully Diluted Market Cap?
A fully diluted market cap represents the hypothetical value of a cryptocurrency if all its tokens were in circulation. This metric gives investors an idea of the potential market cap once all future tokens are minted or unlocked.
But how can you calculate it?
How Is Fully Diluted Market Cap Calculated?
The formula to calculate the fully diluted market cap is simple:
Fully Diluted Market Cap = Current Price of the Token × Total Maximum Supply of Tokens
For example, if a cryptocurrency has a maximum supply of 1 billion tokens and its current price is $1, the fully diluted market cap would be $1 billion.
Using this simple formula, you can calculate the potential future market cap of a cryptocurrency. But why does it matter?
Does Fully Diluted Market Cap Matter?
Yes, it matters because it helps investors understand the long-term potential value of a cryptocurrency and the impact of future token releases on its price.
A high fully diluted market cap may signal potential downward pressure on the price if many new tokens are set to be released in the future, diluting the value of each individual token.
Is A High ‘Fully Diluted Market Cap’ Bad?
Not necessarily. A high fully diluted market cap is not inherently bad, but it can be a warning sign if the current market cap is much lower in comparison.
This gap suggests that many tokens are yet to be released, which could lead to price dilution if demand does not grow at the same pace as the token supply.
But to make a good investment decision, you need to consider the project’s market cap, fully diluted market cap, roadmap, token release schedule, and market demand before making conclusions.
Fully Diluted Market Cap vs. Market Cap
The main difference between a fully diluted market capitalization and a market cap is the supply of tokens used in the calculation. Market Cap is based on the current circulating supply of tokens.
The Fully Diluted Market Capitalization is based on the total maximum supply, including tokens that are not yet in circulation (locked, unminted, or reserved).
Market cap reflects the current value of a cryptocurrency based on the tokens actively trading, while fully diluted market capitalization estimates the value assuming all tokens are eventually in circulation.
But how can these two help us make wise investment decisions?
How Does Market Cap Help in Decision Making?
The market cap helps us understand the size, stability, and risk management of a cryptocurrency and helps analyze competitors.
- Measure of Size and Stability
A higher market cap indicates a larger and generally more established project, which may suggest stability and lower risk. Projects with smaller market caps are usually more volatile but offer higher growth potential if they succeed.
- Risk Assessment and Liquidity
Large-cap cryptocurrencies (like Bitcoin or Ethereum) tend to be less risky and have higher liquidity, making them safer for long-term investments.
Small and mid-cap cryptocurrencies can offer greater returns but come with more uncertainty, as their smaller market size makes them more susceptible to price manipulation.
- Competitor Comparison
By comparing market caps, you can evaluate how a project performs against its competitors regarding user adoption, development, and growth.
How Does Fully Diluted Market Cap Help in Decision Making?
The fully diluted market cap helps decision-making by showing the token’s future supply, price pressure, inflation, and impact and giving long-term investment insight.
- Future Supply and Price Pressure
A high fully diluted market capitalization relative to the current market cap suggests that a large number of tokens are yet to be released (e.g., through vesting schedules, staking rewards, or future minting).
This future supply could lead to price dilution, where the value of each token drops as more tokens are circulated unless there is strong demand growth to absorb the additional supply.
- Token Inflation and Its Impact
A fully diluted market capitalization helps you assess token inflation—how the increase in token supply might affect the price over time.
If too many tokens are released too quickly, the supply could exceed demand, leading to a drop in price.
- Long-Term Investment Insight
As an investor, you need to consider the token release schedule when analyzing fully diluted market capitalization. A slow, controlled token release may pose less risk of price drops, while rapid issuance could lead to significant price fluctuations.
Combining both market cap and fully diluted market capitalization can give you a clearer picture of a project’s current status and future potential.
Use Market Cap and Fully Diluted Market Cap Together
Here are possible scenarios that can happen with market cap and fully diluted market capitalization:
- Small Market Cap + Large Fully Diluted Market Capitalization
- Small Market Cap + Small Fully Diluted Market Capitalization
- Large Market Cap + Small Fully Diluted Market Capitalization
- Large Market Cap + Large Fully Diluted Market Capitalization
Small Market Cap + Large Fully Diluted Market Capitalization
This scenario could indicate significant token inflation in the future. If a project has a small market cap now but a large number of tokens are set to be released, the price might face downward pressure as the supply grows.
Small Market Cap + Small Fully Diluted Market Capitalization
This suggests the token supply is limited, which can lead to scarcity if demand increases, making this potentially a good investment if the project has strong fundamentals.
Large Market Cap + Small Fully Diluted Market Capitalization
This is usually a more stable scenario, as the project has already achieved substantial size and has limited additional tokens to release, reducing the risk of dilution.
Large Market Cap + Large Fully Diluted Market Capitalization
Investors should be cautious, as a large number of new tokens could flood the market in the future, causing significant price dilution unless the project can sustain rapid demand growth.
Summary
The fully diluted market cap is an essential metric for crypto investors, as it provides insight into the potential future value of a cryptocurrency once all its tokens are in circulation.
While it’s important to consider this metric when assessing a project, it should be evaluated alongside the current market cap, token release schedule, and overall market conditions to help you make informed investment decisions.
