DeFi
Why crypto can’t stop debating an obscure metric called FDV – DL News
- New research and testing has reignited a debate within the industry about “fully diluted value.”
- Some have argued that predatory tokenism is increasingly common.
- A class of tokens has avoided these pitfalls.
The long latent debate around the “fully diluted value” of tokens is once again boiling over. On Friday, Binance released a study showing how tokens are increasingly being launched with limited supply and sky-high valuations.
This sparked a wave of responses from crypto developers, investors and more.
Cobie, the influential pseudonymous crypto investor, urged retail investors to avoid newly launched tokens in a widely publicized essay.
Fully diluted value, or FDF, is one of the most controversial topics in crypto. But what exactly is it and why did Binance’s comment shake the crypto community?
What is FDV?
In crypto, many tokens follow the example set by Bitcoin: they have a limited supply, most of which will be released gradually, over a period of several years. Around 2140, all 21 million Bitcoins will have entered circulation.
Bitcoin was trading just above $70,000 on Tuesday. With around 19.7 million Bitcoins in circulation, the cryptocurrency’s market capitalization was around $1.3 trillion.
Fully diluted Bitcoin valuation refers to the market capitalization of Bitcoin if all 21 million were in circulation. Importantly, this assumes that Bitcoin would still trade at the same price as it does today.
FDV became a key metric after crypto developers responded to a regulatory crackdown on initial coin offerings in 2018 and began tapping venture capital to raise funds.
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Risk-based model
This measure proved useful because in the risk-driven model, a relatively small portion of a given token is typically tradable at launch. The rest is reserved for a project’s developers, investors and an affiliated nonprofit responsible for distributing grants to attract users.
These set aside tokens are typically locked for a period of one to three years.
In other words, the new tokens would launch with a limited supply, making their price more sensitive to large or frequent transactions.
“The FDVs of tokens launched in these first months are already approaching the total for 2023.”
— Binance Search
Critics have warned retail investors to avoid tokens with a particularly low “float” or low circulating supply, arguing that a possible influx of new tokens – from developers and venture capitalists who had held their actions due to blockages – would decimate the tokens. ‘ price.
In the heady days of 2021, some investors ignored this warning. The market was booming and each launch seemed to create a new set of millionaires.
However, by the time FTX collapsed in November 2022, the so-called exploitative nature of “low float, high FDV” tokens was a conventional wisdom.
Cobie’s point of view
But these tokens are becoming more common, according to Binance Research.
“Although we are only a few months into 2024, the FDVs of tokens launched in these first months are already approaching the 2023 total, highlighting the prevalence of tokens with high valuations,” researchers wrote.
Some have taken issue with Binance’s methodology, arguing that the relatively high FDV of tokens launching in 2024 is a byproduct of crypto’s rally earlier this year – in other words, a rising tide lifts all boats.
“Valuations within an asset class tend to move together,” Doug Colkitt, founder of DeFi protocol Ambient Finance, wrote. “New token launches tend to trade at a relatively fixed ratio to ETH.”
Others pointed out that most of the new tokens listed on Binance have lost value since their registration date.
In his essay published on Sunday, Cobie argued that retail investors should avoid newly launched tokens.
Indeed, according to Binance Research, an ever-increasing share of token price discovery occurs in private markets. This means that venture capitalists buy tokens at a fixed price before launch, or negotiate the rights to tokens after launch but before unlocking.
Private capture
“In fact, massive private market increases lead to multibillion-dollar valuations at launch, making it more difficult for public market investors to profit from future growth,” the researchers wrote.
This trend is visible in investment data. According to Cobie, over the past few years, the yields of newly launched tokens have declined.
“It is currently not possible to be ahead of the launch of new tokens – as we have seen, private upside capture has happened in an unattainable way,” he wrote .
“In fact, withdrawing and protesting without participation seems to be the right response to many recent token launches.”
Memecoins are skyrocketing
Ironically, the most “useless” tokens avoided these pitfalls.
According to Binance Research, Memecoins, which live and die entirely on hype rather than market fundamentals, typically launch with their entire supply available for purchase and trade from the start.
“Memecoins are typically launched in a way that anyone can access, with little opportunity for institutional participants to acquire low-cost tokens in advance,” the researchers wrote.
No other token has performed as well this calendar year.
Aleks Gilbert is a New York-based journalist who covers DeFi. Do you have any advice? Send him an email to aleks@dlnews.com.