Crypto Metrics (Part 2): Capitalization
Crypto metrics are essential indicators that help investors & traders understand the performance & potential of blockchain tokens.
Crypto metrics are essential indicators that help investors & traders understand the performance & potential of blockchain tokens.
In a previous post, we covered Supply Metrics. In this post we cover Capitalization.
1. Market Capitalization
Market Capitalization is an extensively used metric to measure the relative size of a token. It is calculated by multiplying the current market price of a token by the total number of tokens in circulation.
Market Capitalization = Circulating Supply x Current Price
It's a simple way to gauge the worth of a token, and it also helps investors make decisions about investing in one token over another. However, it's important to note that a high market cap does not necessarily mean a token is more valuable; it just means it's more widely held.
Historically, Bitcoin (BTC) has always had the highest market capitalization and Ethereum the second highest. If this reverses, it would be called the Flippening.
2. Fully Diluted Market Capitalization
Fully Diluted Market Capitalization (FDMC) is a variant of market cap that takes into account the maximum possible number of tokens that can exist for a particular token. This includes tokens that have already been released or mined, but also tokens that have been announced but not yet released into circulation.
In simple words, FDMC is the market capitalization if the maximum supply was in circulation.
FDMC = Price x Max Supply
If the maximum supply is unknown or unlimited, like in ETH, then:
FDMC = Price x Total Supply
If the maximum supply and total supply are both unlimited, then we can't calculate the FDMC.
FDMC gives an indication of the potential value of a token, should all the potential tokens be released. This is particularly useful for new projects where the total supply of tokens is not yet in circulation. Investors can use this as a tool to understand the possible future value of a token.
3. Comparing Market Cap & FDMC
While both these metrics provide useful insights, they serve different purposes.
Market cap gives a snapshot of a token's current value in the market, while FDMC aims to show its potential value in the future.
A significant gap between the two could indicate a large number of tokens waiting to be released into the market. This could lead to a dilution of token value in the future, and investors must take this into account.