Analysis of Fully Diluted Valuation (FDV): How do venture capitalists trade during the token lock-up period? Why might token unlocking lead to price increase?

Assuming the FDV of a project is higher than the valuation of some global tech giants, and it has only been established for a year or two, then it is very worth questioning: "Who holds this huge new wealth? What was their cost of acquisition? Who are they planning to pass the baton to?"

Cryptocurrency trader Cobie explains what "Fully Diluted Valuation (FDV)" means. The content has been summarized in this article. Please refer to the original text for accuracy.

Original link: https://cobie.substack.com/p/on-the-meme-of-market-caps-and-unlocks

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FDV

The market value of a cryptocurrency = market price * current token circulation.

FDV stands for "Fully Diluted Valuation," which is also a valuation indicator. FDV = price * total token supply.

FDV can be larger than the current market value of the token. Generally, the market value displayed on websites like CMC only covers tokens available for trading in the current market, ignoring tokens that are not yet in circulation or awaiting unlocking.

These unaccounted tokens may belong to the team, investment institutions, or tokens gradually released in the future through mining, so FDV is closely related to the future trend of token prices.

Market Value = Demand, FDV = ??

Cobie points out that we can think of "market value" as the "total value based on demand," which changes with fluctuations and demand but still represents the total fair value of a token in the market.

While market value is an indicator of demand, FDV is the complete opposite as it represents supply. Therefore, the Fully Diluted Valuation (FDV) can sometimes be confusing.

Scam Scenario

January: Cobie envisioned a project background that started in January:

• The project's post-funding valuation reaches $50 million.
• Institutions invest $2.5 million, token cost is $0.01.
• Token lock-up period is one year.

March: The project officially launches with a 1% airdrop supply, there is about $5 million in purchasing demand in the market. As mentioned earlier, "market value = demand," so the project's market value reaches $5 million in March. Now:

• Airdrop current circulation accounts for 1% of the total supply.
• Market value is $5 million.
• Therefore, FDV = $500 million.
• Token price is $0.1, institutions unrealized profit is 10x.

May: The project is now the hottest target, listed on mainstream exchanges, rumored to be partnering with Apple, Disney, Oprah Winfrey, and even having a strategic partnership with God. YouTubers are promoting the project, increasing market demand. Users are buying on Binance, now:

• Market value demand increases to $100 million, 20x.
• FDV $10 billion.
• Token price $2.
• Institutions unrealized profit is 200x.

Although market demand only increased by $95 million, FDV has surged to $10 billion. At this point, whether institutional investors, project teams, even if their tokens have dropped by 90% after unlocking, they are still willing to sell and make huge profits.

Why Unlocking Could Be a Bullish Event?

Cobie points out:

Locked tokens still have an active OTC trading market, professional investors ensure the token's lock-up period through legal contracts, especially if the seller is the project team itself, the token lock-up period may even be extended after changing hands.

He described a scenario:

1. Seed investors sell locked tokens at 10x prices to other venture capitalists.
2. Venture capitalists sell at 5x prices.

In this cycle, the unlocked tokens are actually very close to the token market price. During the process, "paper hands" are passed to "diamond hands," and with the market participants' expected profit in the future rising trend, unlocking the tokens actually further eliminates panic.

However, if there is no demand for unlocked tokens in the OTC market, the only way for institutional holders is to sell at the time of unlocking, and Cobie also predicts that over 90% of token unlocking events in 2022 will be bearish.

Cobie believes that venture capitalists are more inclined to buy at relatively low prices, unlike retail investors who always chase highs, so when the valuation of locked tokens deviates significantly from the current market value, holders of locked tokens are more motivated to sell, and venture capitalists will not try to buy unlocked tokens.

Unlocking Schedule

Cobie demonstrated the differences between Bitcoin and other projects. Bitcoin's circulating market value is about $970 billion, FDV is $1.07 trillion, but the extra $100 billion will unlock over a 100-year schedule, as shown below:

Projects with private fundraising and token lock-up periods are as shown below, where the token supply does not start from zero and releases a large amount of tokens annually.

The Importance of Evaluating FDV

Valuing cryptocurrencies is very challenging, and what can be certain is that all projects with high FDV will eventually unlock. Investors should face this and evaluate possible scenarios.

Cobie criticizes the current chaos where investors, projects, and founders seem to be pouring dollars into projects with extremely low circulation, significantly boosting the market value to create huge nominal profits for investors and teams.

If a project's FDV is higher than the valuation of some global tech giants and has only been established for one or two years, then this is highly questionable:

Who holds this huge new wealth? What was their cost of acquisition? Who are they planning to hand it off to?