What is the Difference Between Market Cap and Fully Diluted Market Cap?

A Primer on Two Key Metrics in Crypto Markets

By: Rahul Nambiampurath Loading...

What is the Difference Between Market Cap and Fully Diluted Market Cap?

Companies and blockchain projects represent value in different ways, typically via stocks and digital assets. In both cases, their values differ based on their value being fully accounted for, or just partially. This is the difference between market capitalization (cap for short) and fully diluted market cap.

Market capitalization is produced when you multiply the number of circulating coins for a certain cryptocurrency with the price of each coin.

Diluted market capitalization is produced when you multiply the number of all coins that could exist with the price of each coin.

Let’s dive in deeper to see why diluted caps matter vs. regular market caps.

Crypto Market Cap Explained

Let’s briefly visit the traditional stock market to ground the terms. When stocks are available for public trading, they are called outstanding shares. This is equivalent to crypto’s circulating supply. The market cap of both would then be calculated by multiplying stocks/coins with the price of each.

In contrast, fully diluted market cap accounts for the totality of assets. For example, if a company would convert all of its dilutive securities (options, convertible bonds, warrants) into shares, this would be its fully diluted market cap. In the blockchain world, this dynamic is different because each cryptocurrency has its own way of determining total supply, and some don’t even have a supply cap.

In the cryptocurrency world, when we calculate the market cap by multiplying the number of circulating coins with the price of each, we see its value. This is how much investors who bought a crypto asset value the cryptocurrency.

Raw Numbers

At the end of July 2022, Bitcoin’s market cap was $469B. We arrived at that number by multiplying total circulating bitcoins with the price of each BTC. In raw numbers, this translates to:

19,107,756 BTC (total circulating Bitcoin) x $24,554 (price of each BTC) = $469.17 billion market cap.

To accurately represent the current value of Bitcoin, we had to pick the total circulating supply figure.

This is the number of bitcoins that are actually available for trading, either buying or selling. This includes tokens on cryptocurrency exchanges and private non-custodial wallets.

In other words, total circulating Bitcoin supply measures those Bitcoins that have already been mined. Presently, 91% of a total 21 million BTC has been mined. In 2035, this percentage will reach 99%, and in 2140 all 21 million bitcoins will be mined and available for trade.

Why Do Cryptocurrencies Even Have Circulating Supplies?

Each cryptocurrency has a different encoded mechanism to regulate its circulating supplies. Bitcoin uses a halving mechanism to control supply and inflation. Roughly every four years, miners’ reward for securing the network are cut in half.

New bitcoins released are reduced on a timed, encoded schedule. But what purpose does this artificial inflation control serve?

Imagine that every dollar to ever exist is minted at the same time. That would cause immense inflation, as the USD supply would be so great that it would outstrip the demand. We would then find ourselves in a situation when the same product that once had a price tag of $10 would be priced at $100 or greater.

You can see this effect in a more measured way when the U.S. Federal Reserve increases the money supply, as it did between 2020–2022, by about $5 trillion.

Source: Federal Reserve Bank of St. Louis

Thankfully, the dollar is the world’s global reserve currency, so the inflation only rose to 9.1% in June. When central banks do this in other countries, it can trigger hyperinflation, and banknotes literally become worth less than the paper they are printed on.

Image credit: REUTERS/Carlos Garcia Rawlins

How Do Other Cryptocurrencies Control Their Inflation Rate?

While bitcoin uses a halving mechanism to control its inflation, Ethereum has a burning token mechanic. This means that the more ETH is used, the more ETH tokens are removed from circulation by sending them to an unretrievable wallet. Therefore, they are effectively “burned” out of usable existence.

But wouldn’t that create ETH scarcity? No, because ETH has unlimited token supply. Just like Bitcoin has a halving mechanism, Ethereum has a set inflation rate. After all, the Ethereum network is supposed to be used as a dApp to recreate all the services available in traditional finance.

This makes Ethereum analogous to a nation’s fiat money. But to ensure there isn’t an excessive amount of ETH burned tokens suppress the inflation rate.

Since the EIP-1559 burning mechanic was introduced, $4.4 billion worth of ETH has been burned. Source:

Furthermore, Tim Beiko, one of Ethereum’s chief developers, described Ethereum’s burning mechanic as a counter to miners gaming the system.

Because miners/validators in every blockchain network receive fees when they execute transactions, some miners spam the network with transactions to get more fees. This is an additional reason why Ethereum’s burning mechanic is useful, dubbed Ethereum Internet Proposal (EIP) 1559.

Lastly, there are cryptocurrencies that do not use mining or an inflation rate. Instead, they rely on token unlock schedules to manage demand. These are usually venture capital (VC) funded projects, such as Yuga Labs’ ApeCoin (APE).

Fully Diluted Market Caps Explained

Now that you fully understand the concept of circulating supplies and inflation controls, we can turn to the importance of fully diluted market caps.

Token inflation is the diluting factor for any cryptocurrency, as we have seen with the previous Bitcoin and Ethereum examples.

Diluted Market Cap

Therefore, a fully diluted market cap accounts for all coins to ever exist to calculate the market cap. In the case of Bitcoin, we wouldn’t then need its total circulating supply. Instead, we would just multiply the price of each BTC with the total number of bitcoins that can be mined.

21 million BTC x $24,554 = $515.6 billion fully diluted market cap

This is 9.9% higher than Bitcoin’s market cap based on its total circulating supply, which matches with ~91% of 21 million BTC mined so far.

In cases of cryptocurrencies that don’t have a limited token supply, such as Ethereum, a fully diluted market cap wouldn’t make any sense. That’s because their total circulating supply is in flux. Therefore, ETH would have equal figures for both market cap and a fully diluted market cap.

Can Fully Diluted Market Caps Provide Meaningful Insight?

Because a fully diluted market cap is greater than the regular one, investors may assume that the market cap of digital assets will increase proportionately. Case in point, ApeCoin (APE) has a $2.14 billion market cap, which is 226% lower than its fully diluted market cap at $6.99 billion.

As noted previously, that big difference comes from APE’s token unlock schedule. Presently, only about three out of 10 APE coins are in circulation. An investor may then think that the price of APE will go up by at least three times, as its market cap aligns with its diluted market cap.

However, such an assumption doesn’t account for the relationship between inflation and deflation. ApeCoin’s price relies on its metaverse usage as a utility and governance token. If Yuga Labs succeeds in its mission to deploy highly popular play-to-earn games into its Otherside ecosystem, more investors will seek to buy APE coins that power it.

In turn, people would create a buying pressure that raises APE’s price. This buying pressure would then counter the inflationary pressure coming from the token unlock schedule.

However, if Yuga Labs fails, and Otherdeed becomes mediocre or even a blockchain desert, APE coins will drastically drop in price under the same inflationary pressure. In such a scenario, a fully diluted market cap could even go under its present market cap of $2.14 billion, which only accounts for 30% of APE coins.

For this reason, a fully diluted market cap should be taken with a big grain of salt. In the end, its realization would entirely depend on the viability of the project. On the other hand, cryptocurrencies that are decentralized and out of bounds of VC funding and planning, such as Bitcoin, are more resistant to such speculation.

Series Disclaimer:

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.