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Diluted Market Cap – A Beginners’ Guide
The value of a cryptocurrency is difficult to predict, especially if we are dealing with a new token. If you’re looking to invest in cryptocurrency, measures like the fully diluted market cap can guide your choices.
The term “fully diluted market cap” will represent the core of today’s guide. We’ll begin by defining the sector’s market capitalization before moving on to more advanced notions.
Market Cap in the Crypto Industry
The total worth of an asset now in circulation corresponds to its “market capitalization.” You will often find this notion in its abbreviated form, “market cap.”
Think, for example, of the stock market. If you multiply the number of outstanding shares by the stock price, you’ll obtain the market value of a company.
When it comes to cryptocurrency, the market cap follows a similar rule. You can multiply the existing supply by the coin’s price. It is helpful to compare the size of particular cryptos to other coins using this tool.
A greater market cap in crypto can be a sign of strength in adverse markets. Again, this reasoning comes from traditional finance. Investors can see a large-cap company as a better investment in a bearish phase of the stock market.
The Introduction of Diluted Market Cap?
Crypto projects often choose not to put all their tokens in circulation when they go live. In such a context, a different way to measure market cap can be helpful.
A fully diluted market cap is an indicator that makes two strong assumptions. Namely, we refer to the following statements:
- All the coins are already in circulation.
- The introduction of new coins does not impact a token’s price.
Specifically, we compute it by multiplying the current price of a coin by its final maximum supply.
In crypto, market cap and fully diluted market cap help investors assess individual coins’ general popularity and importance.
The fully diluted market cap might be highly informative when analyzing established cryptos. On the other hand, investors should consider various factors while deciding whether to invest in a coin.
Setting an enormous amount of future coins can heavily inflate the fully diluted market cap. The following section mentions why focusing only on this indicator can be dangerous.
The Problem of Diluted Market Cap
Fully diluted market capitalization overlooks the possibility of reducing the token’s price. Due to an increase in the token’s circulating supply, its price may fall.
The fully diluted market cap introduces another strong assumption. It assumes that the future market cap will rise directly to the existing circulating supply.
Increasing the quantity of a token should theoretically lead to a decrease in the token’s value. We are simply describing how monetary inflation works if you think about it.
In simple terms, it may be wrong to see the fully diluted market cap as a potential market cap target. If you take away inflation from this model, you find yourself in a highly hypothetical situation.
Those who base their investment choice exclusively on this measurement may find themselves in risky situations.
What Can Investors Learn from Diluted Market Cap?
As a measure of the impact of new supply on the market, the fully diluted market cap may represent a proxy. Many people in the crypto industry are concerned about the growing supply of tokens.
The fully diluted value market cap can be part of a robust set of analytical tools for investors. If the fully diluted market cap is huge, many more tokens will be in circulation.
As a general rule, the market capitalization and fully diluted market capital should be close in value.
A fully diluted market cap that is larger than usual indicates that the coin will have large distribution on the market. This operation may result in heavy selling or inflationary pressure. There are ways for crypto teams to avoid falling into this trap.
Holding and locking ample ecosystem liquidity is, for example, a popular system to hedge this risk.
Final Thoughts
Investors can spot long-term opportunities by evaluating a token’s capitalization. In general, volatility is higher for assets with a smaller market capitalization.
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A crypto asset’s future performance and investment potential are hard to predict. In our guide, we mentioned a popular tool to achieve this result. However, it is essential to remember that the most successful traders combine a set of instruments and strategies while investing.
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