What is FDV: Ignoring exaggerated numbers to clearly see the token dilution effect

When investing in cryptocurrencies, you will encounter a very common metric called FDV (Fully Diluted Valuation) or fully diluted market cap. But what exactly is FDV, and is it being used in a misleading way in the market? The answer may surprise many investors: it is an exaggerated figure, misunderstood, and needs to be reconsidered.

Market Capitalization - From Stocks to Cryptocurrency

First, let’s revisit the concept of market capitalization. In the stock market world, market cap equals the stock price multiplied by the number of shares outstanding. It is a way to measure the actual size of a company in the open market.

When tech companies start paying employees with stocks or stock options, a problem arises: each new share issued dilutes the value of existing shares. However, companies are very cautious with this because it directly reduces the value for current investors. Therefore, issuing new shares is not a frequent action.

In contrast, cryptocurrencies operate under a completely different logic. Blockchain protocols continuously issue new tokens—initially to reward miners and network validators (like Bitcoin), but later to incentivize user participation, build ecosystems, and even reward founding teams.

How is Dilution of Tokens Different from Shares?

This is the key difference. When a protocol issues new tokens, unlike a company issuing shares, it usually does not receive any cash inflow. These tokens are simply allocated for free, similar to a stock compensation without any cost to the company.

Take the example of FTT—the token of the FTX exchange before its collapse. When FTT was priced at $25, the market cap was $3.5 billion, and the circulating supply was 140 million. But the fully diluted market cap (FDV) was calculated at $8.5 billion with a total supply of 340 million tokens.

How does FTT “pretend” to be worth $8.5 billion? It would have to sell an additional 200 million tokens at a price $25 per token$5 —but in reality, these tokens are never sold, only issued for free. So where does that “billion” come from? That is the fundamental flaw.

Basic Mathematical Error in Calculating FDV

The logic of FDV depicts an impossible scenario: if 200 million new tokens are issued for free, to reach an FDV of $8.5 billion, the recipients of these tokens would have to generate $5 trillions in value just by receiving these tokens. But how would they do that? No economic theory explains this.

If issuing more tokens increases value, why don’t companies regularly issue shares to increase market cap? Clearly, issuing additional shares without revenue would decrease the value per share, not increase it.

FTT - Lessons from the Past

The FTX disaster is a warning example. When FTT reached $50, it had a market cap of $7 billion, but the FDV soared to $17 billion. However, FTT’s daily trading volume rarely exceeded a few hundred million USD.

This dangerous trio—overstated FDV, small market cap, and low trading volume—creates a perfect environment for price manipulation. With low trading volume, a few parties can control the price. Tokens that are hardly traded are used as collateral for loans, creating a castle built on sand.

Today, FTT has dropped to $0.40, a complete collapse from its previously inflated values.

How to Adjust for More Accurate Calculations

Tokens allocated to the protocol treasury (treasury) for future investments should not be included in the fully diluted market cap as it is currently calculated. These tokens are equivalent to cash on the company’s balance sheet—they do not generate new value but are reserves for future use.

To accurately calculate FDV, the value of tokens reserved for the treasury should be subtracted. For example, if a protocol has 500 tokens circulating at $5 each, the market cap is $2,500. If 200 tokens are allocated to the treasury (worth $1,000), the actual FDV should not be $3,500 but should be adjusted to reflect that $1,000 will be used for investment, thus reducing the net value of the protocol.

Projects like Arbitrum and Optimism also inflate their FDV by including all tokens that will eventually be issued, without accounting for the large number of tokens already allocated to treasuries or ecosystem funds.

Conclusion: Seek the Real Numbers

Smart analysts should not rely solely on FDV to evaluate a protocol. Instead, they should clearly consider the dilution effect in practice, the number of tokens reserved for funds, and the actual trading volume. The current market cap (market cap) is a more realistic figure, but even it should be combined with other indicators for a comprehensive picture.

The flaw of FDV is that it is too simple to calculate but too misleading to use. Use it as a reference, not an absolute rule.