Understanding Market Cap vs. Fully Diluted Valuation
When researching cryptocurrencies, there is a lot of emphasis put on market capacity, and there is often a really large number behind this indicator. But what does market capacity mean? And should you consider it when investing in cryptocurrency?
Not only that, but there is a second indicator known as the fully diluted valuation. Read on to learn more about both of these indicators and whether or not you should consider them when investing in crypto.
What is Market Capacity?
Market capacity is an indicator often associated with cryptocurrency, and some sort of currency valuation. Most cryptocurrencies have a market capacity in USD, though other currencies can be used depending on your location (such as GBP in the UK and the Euro in the EU).
Market capacity is a very basic valuation. It is found by multiplying the number of tokens of a particular cryptocurrency that is currently available by the price of each coin. This gives an idea of how much value the cryptocurrency contains as a whole, but it is also a snapshot, meaning it is only good for the present.
It is important to note that just because a cryptocurrency has a high market cap doesn’t mean it is a good buy. It can be a good indicator, but of course, some highly inflated tokens can also have a high market cap, and in that case, it isn’t a good thing.
Market capacity is a basic evaluation of the value of a particular company, and while it is used in cryptocurrency, it is far more useful in stock trades when deciding shares than the crypto market.
What is Fully Diluted Valuation?
Fully diluted valuation is an indicator that goes far beyond market capacity. More common in the fiat stock market, fully diluted valuation in cryptocurrency includes the potential number of tokens when estimating market capacity using the number above. Unlike market cap, which is a snapshot of the market right now, fully diluted valuation is something a bit more skeptical, and it is used to try and predict the market.
Just like with market capacity, fully diluted valuation is shown in fiat currency, and it does not give any indication whether a cryptocurrency is a good buy. Not only that, but it is speculative, as mining a particular cryptocurrency can stop at any time—meaning you are including tokens in the valuation that may never exist.
We also want to mention that in cryptocurrencies without a ceiling (like Bitcoin) or a burn mechanism, it can be difficult to estimate the fully diluted valuation. Fully diluted valuation also does not account for inflation.
Which Should You Consider When Investing in Crypto?
Although market capacity and fully diluted valuation can be attractive numbers and lead to a making order for cryptocurrencies, we don’t believe that they are viable metrics for considering an investment on their own.
First and foremost, neither of these metrics actually says anything about the solvency or abilities of a particular blockchain. They just tell you how many tokens a cryptocurrency has or might have, and what it is currently trading at. While stock market companies may use these metrics because they have actual assets backing their companies, most of these cryptocurrencies aren’t held to the same standard.
In fact, a cryptocurrency can have a large market capacity and nothing backing it other than the laws of supply and demand, like Bitcoin, for instance. And a company that is fraudulent can also get a large market capacity, particularly if it’s a blockchain that creates more tokens with every purchase.
Therefore, do not get swept away by these numbers. Rather, we recommend looking at the following when you are considering a crypto investment:
1. Read the Whitepaper
The whitepaper is your number one indication of the purpose of a cryptocurrency and whether or not it might be a viable project. If a cryptocurrency doesn’t have a whitepaper, run.
A whitepaper acts like a blueprint, showing what the plans are for the proposed blockchain, how they plan to find funding, and more. Most cryptocurrencies without a whitepaper are scams.
2. Compare to the Market
Unfortunately, there are many similar projects in the cryptocurrency world and while we would love if there were space for them all, there is probably not. So, after you have read the whitepaper, take the time to research the market space. If you see many similar projects, then it makes it less likely that this one will take off.
3. Investigate Who is Behind the Token
Far more important than market capacity and a whitepaper is who is behind the token. Cryptocurrencies with large firms backing them are far more likely to succeed than those with unknown creators. Not only that, but the experience of the creators should match the purpose of the cryptocurrency.
If you ever see someone who is famous making a cryptocurrency just because they are famous, know that the technological specs are probably not met, and while the token might not be a scam, it also probably is. (We are looking at you memecoins.)
4. Don’t Just Buy Hype
So many hyped tokens, like Dogecoin, gain a lot of hype and therefore have large market capacities. Just because a cryptocurrency is hyped doesn’t mean it is good. In fact, we evaluate hyped tokens far more cautiously than those that are underhyped because so many of these are just making money on hype alone. Remember, hype, though it can raise prices, is not technology and not something you can rely on for a return.
Overall, just because a cryptocurrency has a large market capacity does not mean it is a good investment. Both market capacity and fully diluted value are snapshot indicators that can give a small amount of insight about a cryptocurrency, but they should never be used when making investment decisions. Instead, you should be reading whitepapers and investigating the individuals behind a cryptocurrency before you buy anything. Above all else, if it seems suspicious, it probably is.
