Float and FDV: the arithmetic trap in fully diluted valuation

Fully diluted valuation multiplies the current price of a unit by the eventual number of units. Market capitalization multiplies the same price by the units in circulation now. The gap between them is the arithmetic of dilution, and the trap is in the shared price term: it was set by trading in the float, and the calculation then applies it to units the float never contained.

The two figures and the base problem

Market capitalization uses circulating supply. Fully diluted valuation uses a larger base, and which larger base is not standardized. Where a protocol has a hard maximum supply, that cap is the natural choice. Where it does not, some sources use total supply, some project supply at a future date, and some leave the field empty. For an asset with perpetual issuance, the eventual unit count is unbounded, so the honest statement is that the figure is undefined rather than large.

This alone makes cross-asset comparison of published fully diluted figures unreliable unless the base is stated. The ratio of FDV to market cap at least travels with its own definition attached, and it answers a cleaner question: what multiple of today's float the eventual supply represents.

The trap

Price is discovered at the margin. The last trades set the quoted price, and those trades involve a small fraction of even the circulating supply. When that price is multiplied by a much larger unit count, the result is described as what the asset would be worth if every unit existed today, which requires that the price would have been the same had all those units been available to trade. That is a strong assumption and almost always a false one. A market that absorbed a quantity several times larger would have cleared at a different level, because absorbing size moves price. This is not a subtlety; it is the same reason price impact exists in any order book.

Market capitalization inherits a milder version of the same problem, and honesty requires saying so. It also multiplies a marginal price by units that are not for sale, and no one could realize it by selling. The difference is one of degree: the units it counts have at least been distributed and could in principle trade, whereas the fully diluted base counts units that provably cannot trade today and, in the case of an unreached emission schedule, may never exist.

A second problem is time. The units counted in the denominator may not arrive for a decade, and the calculation applies no discount to them. In equity, dilution from options and convertible instruments has strike prices, expiry dates, and a disclosed count; the fully diluted share figure is defined by accounting standards and audited. A fully diluted token base has no strike price, no obligation on the recipient, and often no verified count. Calling both "fully diluted" hides that these are different constructs.

A third is that the eventual base may never be reached. Emission programs are cut short. Reserves are burned. Governance changes schedules. Treating an emission plan as a fact about the future rather than a stated intention overstates the confidence available.

Set side by side, the two measures share a price term and differ in everything else. Market capitalization counts units judged transferable now, applies the traded price to them, describes the present, and carries the weakness that float classification is a judgment call. Fully diluted valuation counts an assumed eventual total, applies the same traded price to units that will exist at some unspecified later time without discounting them, and carries the weakness that it assumes price is independent of quantity. The first is an imperfect measurement of something real; the second is an extrapolation with a hidden premise.

Small float, large multiple

A launch that puts a small percentage of eventual supply into circulation produces a market capitalization that is a small fraction of the fully diluted figure. Two mechanical consequences follow. Price is set by trading in a thin float, so it moves more per unit of flow than a larger float would. And the fully diluted figure is dominated by units subject to unlock overhang, whose eventual arrival is scheduled but whose recipients' behavior is unknown.

Neither consequence is a verdict. A high FDV-to-market-cap ratio is a description of distribution stage, not a judgment about the asset, and the same structure appears in early distributions of protocols that later distribute fully and in ones that never do. What the ratio does support is a demand for consistency: a reader comparing two assets is entitled to know whether the numerator and denominator use the same base for both.

Ratios that use these bases

Fully diluted valuation is often placed over an activity measure, as in FDV to fees or FDV to total value locked. These resemble an equity multiple and differ from one in ways worth stating. Fees are not earnings: they are gross payments by users, before whatever share goes to liquidity providers, validators or other supply-side participants, and before any costs. There is no audited income statement and no accrual accounting. And the holder of the token frequently has no claim on the fees at all, so the denominator may be revenue accruing to someone other than the person holding the numerator.

Using the fully diluted base in the numerator compounds this by comparing a future unit count against a current flow. If both supply and usage are expected to grow, the ratio mixes a future numerator with a present denominator. There is no correct fix inside a single ratio; the discipline is to state which base is used and to read the market-cap version alongside it. Reading market cap to fees and the fully diluted version together shows how much of the difference is the supply base and how much is anything else.

What to look at instead of a single number

The informative set is small: how much supply is circulating, how much is pending, over what period the remainder arrives, and how those quantities compare with the market's demonstrated capacity to absorb size. Market depth and turnover speak to the last of these. None of these produce a valuation; they establish what a valuation figure is actually describing.

The valuation pages show both bases for every ratio, labeled, and compare holds the base constant across assets. The next lesson looks at supply that is locked by choice rather than by schedule: staking.