Market Cap, Honestly

It says nothing about how much capital the project has actually raised, only what the last trade suggests investors are willing to pay.

Those basics are true for any currency from Bitcoin to Magic Internet Money. But it is only a starting point. Circulating supply excludes some coins for important economic reasons, and the difference between circulating and total supply creates an even more important number: fully diluted valuation (FDV). It is essential to understand what market cap can and cannot tell you, and how large scheduled unlocks can later reshape the picture.

How the basic numbers are built

Market capitalization is determined by current price multiplied by circulating supply. Circulating supply is the number of coins currently available in the market and actively traded. It excludes the early tokens held by founders, developers, and early investors, as well as any coins that have been destroyed or burned. CoinMarketCap states that circulating supply is the best approximation of assets trading in the general public's hands.

While total supply counts all available coins, not just those in active circulation, maximum supply is the cap written into the protocol to limit the total supply, wherever that exists. Some cryptocurrencies have capped the maximum supply, while the maximum supply is infinite for others.

Why FDV exists

Once you have a complete picture of total supply—whether or not those tokens are in circulation—you can calculate the "fully diluted valuation" (FDV) of a coin. FDV is determined by multiplying the current price by the total supply, says crypto.news. What that means is that FDV is an estimation of the potential future value of a cryptocurrency. It shows what the cryptocurrency would be worth if every token currently not circulating did in fact exist at today's price, according to crypto.news.

It is important to understand the distinction between market cap and FDV. Where market cap counts only the coins in circulation, FDV includes all coins in the total supply, even those not yet issued. A hypothetical coin with 5 billion in circulation at $0.50 would have a $2.5 billion market cap. If it issues a total of 10 billion, its FDV would be $5 billion if the price remained unchanged. These future tokens are not the only factor that affects FDV, but having large allocations locked up for team or investors is another warning sign.

Why unlocks change the picture

An unlock is when previously locked tokens, typically held by the team or early investors, are released into the circulating supply for the first time. It can have a major impact on the economics of the cryptocurrency. CoinTracker explains that this is determined by token release schedules, while CoinMarketCap says these schedules are a critical input in determining circulating supply.

A large unlock can put downward pressure on the price because it suddenly increases the circulating supply. It is like diluting ownership by selling new shares. If there is no matching increase in buying pressure, the increased supply can drive the price down. But a gradual unlock over many months can allow the market to gradually absorb the tokens without a big impact on the price.

What market cap does not tell you

It is a common misunderstanding that cryptocurrency market cap represents the total amount of money put into the project. Just because a cryptocurrency has a market cap of $100 million, it does not mean that $100 million was invested in that cryptocurrency. The quoted price is determined by each trade, not the total amount of capital flowing into the asset.

For a true measure of an asset's market depth, traders also look at volume. But this is another figure that is far from objective. Unregulated trading platforms have been known to engage in "wash trading," where traders artificially inflate volume to attract investors. This practice, along with thin liquidity, means a large order can move the price and a small order can have an outsized impact.

The comparison trap

When comparing different cryptocurrencies, a common mistake is to focus exclusively on market cap or unit price. But these metrics can be misleading if considered without context.

The difference between a $1 token and a $1000 token is not the price in itself, but the number of tokens in circulation. A $1 unit price with a massive circulating supply can be just as expensive as a $1000 unit price with a tiny circulating supply. Consider the following hypotheticals to see the difference.

A hypothetical coin with an extremely large supply and low unit price could have a market cap of $10. Another hypothetical coin with a single unit and high price could also have a market cap of $10. Metacoin3 and Metacoin4 are priced at the same market cap, but a single Metacoin4 is worth as many as 100,000,000,000 Metacoin3, which costs the same price.

Another comparison that often leads to confusion is between market cap and FDV (fully diluted valuation). As mentioned earlier, FDV is an estimate of a cryptocurrency's value if all its coins were in circulation. Two hypothetical coins could each have a market cap of $500 million. Metacoin5 has 1 billion coins in circulation, each worth $0.50. Metacoin6 has only 100 million coins in circulation, worth $5.00. But Metacoin6 has 1 billion coins in its total supply, so its theoretical FDV is $5 billion, whereas Metacoin5 has a much higher FDV.

When comparing cryptocurrencies, the number you choose can tell a very different story. Market cap and FDV are both useful metrics, but they capture different dimensions of the same thing.