Fully Diluted Valuation (FDV): Is it a genuine metric or a market trap?

The Hidden Warning Signs Ignored During Market Frenzy

In a bull market wave, it seems like all projects shine brightly, but many traders overlook a key evaluation metric. When new projects keep launching, you often see this phenomenon: certain tokens have an absurdly high fully diluted valuation (FDV), while their actual circulating market cap is just a fraction of that. What does this really mean? Should we be worried?

Recently, the Arbitrum (ARB) token unlock event gave us a painful answer.

ARB Case: Numbers Don’t Lie

On March 16, 2024, when the Arbitrum team unlocked 111 million ARB tokens, the market experienced turbulence. This unlock represented a one-time release of 76% of the circulating supply at that time—almost doubling the amount of ARB in the market.

Previously, ARB’s price hovered between $1.80 and $2. But once the unlock announcement was made, many holders started selling in advance. Their logic was simple: supply surges, demand remains unchanged, and the price must fall. It was a self-fulfilling prophecy—everyone was waiting for the drop, and the drop indeed happened.

Within days after the unlock, ARB’s price fell over 50%. The Relative Strength Index (RSI) showed the asset was severely oversold, and a death cross formed. While Arbitrum’s fundamental position as an Ethereum layer-2 solution remained unchanged, holders’ accounts had already shrunk.

What is FDV? Why Is It So Important?

FDV stands for “Fully Diluted Valuation.” The calculation is straightforward:

Current Token Price × Max Supply = FDV

For example, if Bitcoin (BTC) is currently priced at $96,180, and the max supply is 21 million, then the FDV is $1.921 trillion (about $1.92 quadrillion).

But here’s the key point: FDV assumes all planned tokens will eventually enter circulation. This assumption often doesn’t match reality. Project teams may change plans, tokens may be burned, or unlock schedules may be delayed.

FDV vs Circulating Market Cap: Two Completely Different Numbers

If you look at a coin’s market data, you’ll notice these two figures are often vastly different:

• Circulating Market Cap: current tradable tokens × price
• FDV: all possible tokens × price

Circulating market cap includes:

• Tokens already on exchanges
• Locked tokens scheduled for release
• New tokens generated via mining or staking

That’s why these two numbers can differ by ten or even a hundred times.

Is a High FDV Really an Opportunity?

Advantages of FDV

Visible Future Potential
For long-term holders, FDV helps assess the project’s theoretical ceiling. If you believe in the project’s success, then when all tokens are in circulation, FDV can give an approximate scale of the project.

Facilitates Cross-Project Comparison
Projects with vastly different circulating supplies are unfair to compare based solely on market cap. FDV provides a unified metric for comparison.

Pitfalls of FDV

Overly Idealistic Assumptions
FDV relies on a big premise: all tokens will enter circulation as planned. But reality often differs. Tokens may be burned, unlocks delayed, or the project may fail altogether.

Ignores the Most Critical Factor: Demand
A project’s success ultimately depends on how many people want it. FDV completely ignores factors like utility, community size, and technological innovation. No matter how high the FDV, if no one uses the project, the price will still fall.

Token Unlocks: The Market’s Most Feared Event

Whenever a large-scale token unlock period (industry term: “vesting”) approaches, the market gets tense. Why?

Panic Selling by Short-Term Traders
They know unlocks increase supply, so they sell early to lock in profits. This triggers a chain reaction.

Spreading Panic
Once prices drop, more people join the selling, fearing they’ll miss the chance to escape. At this point, no one cares about the project’s fundamentals—only one thought remains: get out quickly.

Look at once-prominent projects: Filecoin (FIL) at $1.54, Internet Computer (ICP) at $4.27, Serum (SRM) at $0.01—these once-revered “revolutionary” projects have all gone through similar cycles.

The Truth About High FDV Projects Frequently Failing

Data shows an unsettling trend: projects with high FDV and low circulating supply often experience price crashes during token unlocks.

But be cautious not to over-interpret the data:

Time Window Limitations
Data may only reflect a specific period and not indicate long-term trends.

Correlation ≠ Causation
Price drops may be caused by unlocks, but could also result from overall market adjustments, technical issues, or other news. For example, ARB’s decline might also be influenced by ETH spot ETF uncertainties.

Unlock Method Matters
A one-time unlock of 111 million tokens has a much bigger impact than small, staged unlocks. The project’s token release schedule directly determines the risk level.

Is This a New Problem or an Old Trick?

If you experienced the bull market in 2017 or 2018, today’s scene might feel familiar.

Back then, projects like Filecoin and Internet Computer also attracted huge investments due to high FDV and grand visions. But what happened? Prices plummeted, and holders lost everything.

Is the market more mature now? Maybe. But look at the current hot sectors like DePIN (decentralized physical infrastructure) and RWA (real-world asset on-chain) — many of these projects also gain attention because of high FDV and appealing stories.

The key question: can these projects deliver on their promises? Or are they just another round of hype-driven shells?

Practical Advice for Traders

Don’t Blindly Trust High FDV

High FDV doesn’t necessarily mean high potential or profitability. It’s just a number game. What really matters is:

• Actual usage and on-chain activity
• Token unlock schedule (when large amounts are released)
• Team’s execution ability (are they actually building?)
• Community base (real users or just speculators)

Beware of “Artificial Scarcity”

Low circulating supply + high FDV sounds attractive, but it’s often artificially created scarcity. Once unlocks begin, this “scarcity” disappears instantly, and prices can crash.

Do Your Homework and Make Informed Decisions

Before investing, research the project’s token release plan. When are tokens unlocked? How many? These details directly impact risk assessment.

Conclusion

FDV is neither a complete scam nor a fully trustworthy metric. It’s more like an alarm—highlighting the huge gap between a project’s actual valuation and its theoretical valuation.

Projects marked with high FDV and low circulating supply can indeed become dark horses. But more often, they trap traders chasing quick profits while ignoring risks.

In this market, the most important thing is never the metric itself, but whether you can see through the truth behind the numbers.