Market capitalization (market cap) in cryptocurrency is the total value of a token's circulating supply, calculated as current price multiplied by tokens in circulation. Fully diluted valuation (FDV) extends this to the maximum total supply, assuming all tokens are released.
The market cap / FDV ratio equals circulating supply divided by total supply, often expressed as a percentage. A high ratio (e.g., 80-100%) indicates most tokens are already circulating, minimizing future dilution risk. This suggests stability, appealing for long-term investors as price is less likely to drop from supply influxes. Examples include mature assets like Bitcoin.
Conversely, a low ratio (e.g., 20-40%) signals significant unreleased supply, potentially from vesting, rewards, or emissions. This poses dilution risk: as tokens unlock, supply increases, exerting downward price pressure if demand doesn't rise accordingly. Traders view low ratios as red flags for overvaluation, often avoiding or shorting such tokens, especially pre-unlock events. Historical cases like ICP in 2021 show sharp declines post-dilution.
In trading, the ratio aids risk assessment—combine with unlock schedules and fundamentals for strategies like timing buys post-unlocks or diversifying portfolios. It's not foolproof, ignoring burns or demand shifts, but highlights supply-side pitfalls for informed decisions.
