Yes, it’s a bear market, and everything looks grim. But that doesn’t mean investors should despair. Indeed, there are number of steps you can take to evaluate the crypto market at this juncture.
That’s why The Defiant is launching a series of guides to help readers navigate this tricky period in the markets. In this debut installment, we look at some of the most important metrics investors should examine when sizing up a blockchain project.
Here’s a primer on the essentials of tokenomics:
How to Measure Tokenomics
The core concept of crypto tokenomics is supply and demand. These forces set prices. The number of tokens issued to the public is controlled by the project’s team or a pre-defined algorithm.
· Circulating Supply is the number of tokens circulating in the current market, which constantly changes as new tokens unlock/existing ones are burnt.
· Total Supply – Circulating Supply + Locked Tokens – Burned Tokens
Market capitalization refers to a project’s total value and can be calculated by
· Market Cap = Circulating Supply * Current Token Price
Fully Diluted Valuation (FDV) refers to the total market cap if all tokens are unlocked and are circulated:
· FDV = Total Supply * Current Token Price
The market cap is always lower than FDV because there are tokens to be unlocked or issued, which could come from the developing team, investors, or crypto mining. As you can see, market cap reflects a token’s “public demand” while FDV is more of an indicator of supply.
Market Cap vs. FDV and Why It Matters
When Ether (ETH), the native token of Ethereum, was first launched in 2014, about 83% of the total value (60 million) was distributed to the market. The annual issuance of ETH was fixed at 18,000,000 and had an unlimited total supply.
The Ethereum white paper outlines how the ETH inflation rate tends towards zero over time:
This, however, is no longer the case if you look at the most recent blockchain projects. Odds are that many have an FDV significantly higher than the market cap to attract more investors. In other words, only a tiny portion of the total tokens was released when the projects just launched. And once the remaining tokens are unlocked, this suddenly massive supply may lead to inflation and a plunge in value.
FDV could be very important when you’re comparing two similar projects. If a blockchain project has an unusually high FDV when it’s just launched, remember to check out its economic model: How many tokens remain to be unlocked? Does the developing team have a mature roadmap to deal with inflation? Who’s holding and trading the locked tokens behind the scenes?
In a nutshell, FDV allows you to identify if a token’s price is overvalued and avoid the traps caused by the low initial supply, especially for long-term investors. Even though crypto valuation can be very difficult– you don’t have any balance sheet or income statement to look at, and this is a very young market with 24/7 liquidity compared with traditional finance, knowing those basic concepts of tokenomics still helps with your fundamental analysis of crypto projects.
This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.