Why Crypto Can’t Stop Debating A Mysterious Metric Called FDV – DL News

The long-simmering debate surrounding the ‘fully-diluted value’ of tokens is back on the boil. Binance published research on Friday showing how tokens are increasingly starting with limited supply and sky-high valuations.

This sparked a flurry of reactions from crypto developers, investors and more.

Cobie, the influential pseudonymous crypto-investor, urged retail investors to avoid newly launched tokens in a widely circulated essay.

Fully diluted value, or FDV, is one of the most controversial topics in crypto. But what exactly is it, and why did Binance’s comments send the crypto community into a frenzy?

What is VAT?

In crypto, many tokens follow the example set by Bitcoin: they have a limited supply, most of which will be released incrementally over a multi-year period. Somewhere around the year 2140, all 21 million Bitcoins will have entered circulation.

Bitcoin traded just over $70,000 on Tuesday. With around 19.7 million Bitcoin in circulation, the cryptocurrency’s market capitalization was around $1.3 trillion.

Bitcoin’s fully diluted valuation refers to the market capitalization of Bitcoin if all 21 million were in circulation. Crucially, this assumes that Bitcoin will continue to trade at the same price it is today.

FDI 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 money.

Risk-driven model

The metric was useful because under the enterprise-driven model, a relatively small portion of any given token is typically tradable at launch. The rest is set aside for a project’s developers, investors and an affiliated nonprofit tasked with handing out grants to attract users.

Those set-aside signs are typically closed for a period of one to three years.

In other words, new tokens will be launched with limited supply, making their price more sensitive to large or frequent transactions.

“The FDVs of tokens launched in these initial months are already approaching the total for 2023.”

– Binance Research

Critics have warned retail investors to avoid tokens with a particularly “low float” or low circulating supply, arguing that the eventual flood of new tokens – from developers and venture capitalists who have held onto their shares due to lock-ups – the tokens would destroy ‘ price.

In the heady days of 2021, some investors ignored that warning. The market was tearing up, and every launch seemed to have a new set of millionaires.

By the time FTX collapsed in November 2022, the perceived exploitative nature of “low float, high FDI” tokens was conventional wisdom.

Cobie’s point of view

But those 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 initial months are already close to the total for 2023, underscoring the prevalence of tokens with high valuations,” researchers wrote.

Some have taken issue with Binance’s methodology, arguing the relatively high FDI of tokens launched 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,” wrote Doug Colkitt, the founder of DeFi protocol Ambient Finance. “New token launches tend to trade at a relatively fixed ratio to ETH.”

Others have pointed out that most new tokens listed on Binance have lost value since their listing date.

In his essay published on Sunday, Cobie argued that retail investors should avoid newly launched tokens.

That’s because an ever-increasing share of tokens’ price discovery takes place in private markets, according to Binance Research. This means venture capitalists buy tokens at a set price before launch, or trade the rights to tokens after the launch, but before their unlocking.

Private catch

“Effectively, massive private market raises lead to multi-billion dollar valuations at launch, making it more challenging for public market investors to take advantage of future growth,” the researchers wrote.

This trend can be seen in investment data. Over the past few years, returns on newly launched tokens have declined, according to Cobie.

“It is not currently possible to be ‘early’ for new token launches – as we have seen, the private capture of upside happened in an inaccessible way,” he wrote.

“In fact, opting out and protesting a lack of participation seems like the correct response to many recent token launches.”

Memecoins are rising

Ironically, the most “useless” signs avoided these pitfalls.

Memecoins, which live and die entirely by hype, rather than market fundamentals, usually launch with their entire supply available to buy and trade from the start, according to Binance Research.

“Memecoins are typically launched in a way that is accessible to anyone, with little opportunity for institutional participants to acquire tokens at a low cost ahead of time,” the researchers wrote.

No other sign has done as well this calendar year.

Aleks Gilbert is a New York-based reporter covering DeFi. Do you have a tip? Email him at [email protected].