Cryptocurrency has exploded in popularity in a relatively short period of time. Given that the monster in the market, Bitcoin, has only been around for a little more than a decade, the growth seen is something that financial markets have not experienced before.Thank you for reading this post, don't forget to subscribe!
And when it comes to adding a valuation to a blockchain or crypto asset, one of the more obvious metrics that comes up is market cap and fully diluted market cap. Since they have different definitions, it is important to know the difference between the two.
What is the Difference Between Market Cap and Fully Diluted Market Cap?
To fully explain the difference between the two, we must break them down first. Let’s first take a look at market caps before explaining what fully diluted market caps are. In doing so, we can not only learn what their definitions are but how both are pretty similar in value overall.
The market cap, short for market capitalization, is considered to be the total network value of a cryptocurrency at any given time. It can also be calculated by the sum of all the tokens that are currently in circulation, multiplied by the token’s current price.
Basically, this is the total number of coins out there multiplied by the price per coin. That is what the total market cap for that particular cryptocurrency is.
The market cap is typically used to determine and rank the popularity and size of a specific cryptocurrency. Those cryptos that have a higher market cap are often seen as the more popular ones. This is because there are a lot more holders of coins at the current prices. This is what contributes to an overall higher network value.
Finally, cryptos that have a higher market capitalization are more likely to become the type of stable investments that investors are looking for, especially when compared to smaller market cap. Those cryptos that have smaller market caps are much more prone to price fluctuations than those with higher market caps.
Fully Diluted Market Caps
Now, onto the other end of the spectrum. Fully diluted market caps measure market caps after all of the coins have been issued. This is the sum of the total supply of the coin multiplied by that coin’s current price.
Let’s use the big dog on the block for this example. Bitcoin has 18,970,300 coins in total, while the total BTC amount that will be minted is 21 million. You would multiply those 18.9 million coins (the current market cap) and multiply it times the amount for a single token of Bitcoin. To determine the fully diluted market cap, you would multiply the 21 million times that same price.
It is interesting to see what will happen with the Bitcoin market when they ultimately reach the fully diluted market cap. It is necessary to determine whether it remains the best cryptocurrency available. There are some drawbacks to a fully diluted market cap, so let’s get into those next.
The Limitations of a Fully Diluted Market Cap
There are, of course, some limitations when it comes to fully diluted market caps. Determining what that is for a specific cryptocurrency can be one of the determining factors for helping you to choose whether or not a particular cryptocurrency may be a good investment.
Some of the things that a fully diluted market cap does not take into consideration are additions or departures from that coin’s developmental team, competitor offerings, future developments within the project, and future market relevance for that project.
Investors not taking those factors into consideration is just the tip of the iceberg, though. A fully diluted market cap also does not take one important fact into account. That would be an increase in the overall token supply and what impact it could have on that token’s value going forward.
Let’s consider a token that has a current circulating supply of 50,000 with a token price of $5.00. There is an assumption that the token price will stay at that $5.00 market even when the maximum supply of 100,000 has all been put into circulation. That might not be the case, however.
To put it in simpler terms, a fully diluted market cap can’t be the sole metric that investors use to determine whether a particular cryptocurrency project will make for a sound investment.
As a matter of fact, there are a few more factors that can play a major role in the value of that particular cryptocurrency. A fully diluted market cap is just one of those factors.
Fully diluted market caps might show higher market caps, but they ultimately disregard any of the potential decreases in the token’s price with the increase in their circulating supplies. This is alongside the drawback that fully diluted market caps run on the assumption that a future market cap will ultimately increase the direct proportion to the current circulation supply.
This is not generally true since, in theory, when the supplies increase, they should work to push down the token price as a factor of oversupply, causing inflation. Investors should be aware that when looking at fully diluted market caps, the metric doesn’t consider things like the impact of said inflation on that fully diluted market cap.
If you are just starting out in cryptocurrency, there can be a lot of confusing terms out there. Knowing the difference between market cap and fully diluted market cap can be an important distinction to learn.
While that is just the start of learning more about crypto or specific coins, it is an important piece of information to have. It can give you a much better idea of the true value of the coin before you begin investing in it.