Market valuation is crucial while determining the true worth of an asset. You need to have a basic understanding of an asset especially when you are aspiring to invest your hard-earned money in it. You also need the metric if you are assessing an asset for taxation purposes. FMV or Fair-Market-Value is one of the most widely used market valuation metrics in the asset market. Apart from traditional assets like stocks or real estates, FMV is now applied to gauge the value of buying cryptocurrency as well.
What does it imply by the term FMV?
Well, FMV refers to the approximate value of crypto assets that both trading parties would agree to in a “normal” condition. In other words, FMV refers to a hypothetical “market value” that denotes an ideal price for the crypto asset. On the other hand, market value refers to the value at which the asset is being sold in the market in real-time.
For example, Bitcoin has now plummeted to a new low in November 2022 after a crash, reaching below $17,000. If someone sells 1 BTC now, s/he would receive an amount below $17,000. However, the same BTC had reached $69,000 at the same time in 2021 with its 2nd ATH. Though ATH is a special situation, BTC’s FMV is also not below $20,000.
How do you calculate?
There are various sites online that help to calculate the FMV of your chosen crypto.
These sites collect market data straight from leading crypto price aggregators. These platforms also take into account the transaction data of the users to find market price. For example, say, if the user purchased 1 Ethereum for $2,000, $2,000 would be considered as FMV for this particular transaction.
One of the best advantages of these sites is that these platforms are able to measure FMV of a crypto asset at any timestamp. These sites integrate with several leading 3rd party API platforms that are dedicated to calculate FMV of various cryptos. After getting the FMV, these sites use their on-site algorithms to gauge whether the user had paid less or more than s/he would have paid for the crypto purchase.
Let’s study an example
Let’s say, a crypto user has traded 1 BTC for 5 XRP in 2015, at around 3 in the noon.
Now, the FMV calculation sites would check the date and time as to when the trader had purchased the crypto. This will help to check the FMV of the crypto on a local currency, say USD.
So, let’s say, the BTC was bought in 2012 when the FMV of the asset was $350. During the time of the trade, the FMV of 1 BTC was around $4,500. Thus, when the crypto user is trading 1 BTC for 5 XRP, the recorded gain is $4,150 ($4,500- $350). $4,500 is the cost basis for investing in 5 XRP in 2015. buy btc
Now, let’s say, the trading fee (for 2015 trade) is 1 ETH. For this example, we will count 1 ETH price as $1,600. After you get the numbers, subtract $1,600 from the gain mentioned above ($4,150). The net gains received from the trade would be equivalent to sales proceeds subtracted by cost basis.
So, the calculation would be like-
$4,500 – ($350 + $1600)= that would be equivalent to $2,550.
Crypto market is characterized by extreme volatility. Thus, it’s extremely crucial for investors to gather a basic idea on the FMV of a crypto asset to attain clarity on the worth of their investments. Apart from investment aspects, the FMV of crypto or any asset for that matter would help in judicious allocation of the asset in certain situations such as divorce, asset distribution for will, and so on.