If you’re new to crypto, you might have heard about Fully Diluted Valuation (FDV) but not fully grasped its significance. It’s one of the most critical metrics to evaluate, yet it’s often overlooked or misunderstood—leading to serious miscalculations about a token’s future potential. Let me break it down for you and show you why a high FDV-to-market cap ratio can be much worse than you might think.
Market Cap vs. Liquidity: The Missing Link
First, let’s clear up a common misconception. People often assume that a token’s market cap is a good proxy for its liquidity. Spoiler: it’s not. In fact, the market cap of a crypto token is almost always vastly greater than its liquidity.
For example, let’s say a token has a market cap of $1 billion. How much liquidity does it actually have? It depends on the token, but generally speaking, liquidity is much smaller than the market cap—often a fraction of it. A reasonable estimate might be around 10% of the market cap, though this can vary significantly.
Now, here’s where things get really concerning: when you factor in Fully Diluted Valuation.
FDV: The Elephant in the Room
FDV represents the market cap of a token if its entire supply were in circulation. If only 10% of the total supply is currently released, the FDV is ten times the current market cap. So in our example, a $1 billion market cap translates to a $10 billion FDV.
But here’s the kicker: liquidity doesn’t scale with FDV. If the token’s liquidity is just 10% of the market cap, the FDV-to-liquidity ratio becomes 100 to 1. That’s an enormous gap.
Why This Matters
Now think about what happens when those locked tokens start getting released. Whether they’re unlocked gradually or in large chunks, the market will need to absorb these additional tokens. And it’s not just a matter of increasing the token supply tenfold (to match the FDV-to-market cap ratio). You’re effectively increasing the supply relative to the liquidity—and that’s where things get dangerous.
When a token’s FDV is 10x its market cap, and liquidity is 10% of the market cap, the FDV-to-liquidity ratio is 100x. This means there’s a massive overhang of tokens relative to the actual liquidity in the market.
The Real Challenge: Finding Enough Buyers
Early investors, founders, and foundations that hold these unlocked tokens often sell to lock in their gains. That’s normal. But the problem is this: the market will need a huge influx of new buyers to absorb all those tokens being sold.
And we’re not talking about a few extra buyers here. The market needs 100x the liquidity to support the token price when FDV is fully realized. Without enough demand, token prices are almost guaranteed to drop under the weight of this selling pressure.
Key Takeaways
- Liquidity matters more than you think: A token’s market cap is not a reliable indicator of its liquidity, which is often just a fraction of the market cap.
- FDV amplifies the problem: A high FDV-to-market cap ratio translates into an even larger FDV-to-liquidity ratio, compounding the challenges.
- Buyer demand must scale dramatically: To support the price of a token as more supply enters the market, the number of buyers must increase exponentially. This is rarely feasible.
The Bottom Line
When evaluating crypto tokens, don’t just glance at the market cap and FDV as isolated metrics. Instead, consider how they relate to liquidity and the supply schedule. A high FDV-to-market cap ratio isn’t just a red flag—it’s often a sign that the token could face significant downward price pressure as more supply is unlocked.
By understanding this dynamic, you’ll be better equipped to make smarter investment decisions and avoid getting caught in projects with unsustainable economics.
Related Posts: