There are several ways to calculate market capitalization, and one of the methods to estimate the future value of the network is called “diluted market capitalization”. Today we’re going to learn about it.
Definition
The term “diluted market cap” comes from the stock market. In the stock market, this value represents the valuation of a company after all stock options have been exercised and all securities have been converted into shares.
At the same time, it is also important to keep an eye on the current and future supply of cryptocurrency assets. Not all cryptocurrencies, tokens and assets have reached their supply caps at the time of valuation.
For example, we know that the supply of Bitcoin is capped at 21 million. As of today, there are 18.505 million bitcoins in circulation. Calculated at around $10,550 per bitcoin, the market value is about $195.2 billion.
Diluted market capitalization is calculated using the Bitcoin supply cap. So multiplying 21 million by Bitcoin’s current price of $10,550 gives Bitcoin’s diluted market capitalization, which is roughly $221.5 billion.
The same concept applies to all crypto assets on the market. Diluted market capitalization is equal to the asset’s current price multiplied by the highest tradable supply. Considering the constant fluctuation of asset prices, this value cannot be used as an accurate measure, but it can still be used to judge whether an asset is undervalued or overvalued.
Deflationary Tokens
The circulating supply of many cryptocurrencies grows year by year. In this case, the diluted market capitalization of the cryptocurrency will be higher than it is currently, even if the price remains the same.
Also, deflationary tokens are actively reducing their supply. There are many ways to deal with it, one of which is token burn, which will reduce the maximum future supply of a particular asset.
If the asset value does not increase year by year and the supply continues to decrease, the market capitalization in the next few years will be lower than the current one.
For example, BurnCoin currently has a maximum supply of 20 million coins at a unit price of $1. However, the team decided to buy back and burn tokens from the market, reducing the maximum supply of BurnCoin to 18 million.
After the announcement of the token burn, the price of BurnCoin remained at $1. Based on future token burns, the diluted market capitalization of the token is:
18 million BurnCoin x $1 = $18 million
However, at the moment of the announcement of the token burn, its market value is:
20 million BurnCoin x $1 = $20 million
In this case, the diluted market capitalization is actually lower than the current market capitalization. Keeping the above example in mind, there is a lot that can happen between the announcement of the news and the actual destruction of the tokens.
Even after the destruction, the token price will still go up and down. Diluted market cap is not an accurate indicator at all for a deflationary token with frequent token burns. The diluted market value is similar to the current market value and can only be used as a rough reference to estimate the future value of the asset.
Conclusion
Cryptocurrency market capitalization is a key indicator to watch, reflecting the ups and downs in the value of the entire cryptocurrency industry. It would also be helpful to compare the current published market capitalization with the future development of the diluted market capitalization.
At the same time, there are other metrics to consider, since market cap is just one piece of the puzzle. Financial investments should only be made after researching other aspects of the cryptocurrency industry.
