The circulating supply of a cryptocurrency affects buying or selling pressure and even the ability to trade easily. But what is circulating supply, and how does it differ from other supply metrics?
Keeping it simple, circulating supply refers to the number of coins or tokens currently in public circulation and available for trading. This metric is crucial for investors and traders as it helps determine a cryptocurrency’s likely price action.
This guide provides a comprehensive resource for understanding how supply affects the market for Bitcoin, Ethereum, XRP, Dogecoin, or your favorite crypto. Let’s start with some key takeaways before we explore supply metrics in more detail.
Key Takeaways: Circulating Supply
- Circulating supply is the total number of coins or tokens currently available for trading that are not locked or reserved in any way.
- Changes in supply, such as those caused by block rewards, token locks and unlocks, or token burns, can significantly impact the price.
- Understanding the difference between maximum, total, and circulating supply is crucial for investors and traders. These three metrics affect current and future prices.
- The competitive landscape and demand for a particular cryptocurrency can also impact the significance of its circulating supply.
Circulating Supply Explained
What does circulating supply mean in crypto? Circulating supply refers to the total number of coins or tokens that are currently available for trading. This excludes tokens that may exist but are locked. In effect, locked tokens aren’t tradable, which hints at the real reason to watch circulation supply instead of total supply. Both are important, but the circulating supply affects the immediate market.
The circulating supply can be calculated using a simple formula, although many crypto data sites provide the metrics for each coin.
Circulating Supply Formula
- Circulating Supply = Total Supply – Locked Tokens
Let’s break down those terms to better understand the meaning of circulating supply in context.
- The total supply refers to the total number of coins that exist. Total supply also accounts for burned tokens (sent to an unrecoverable address). Notably, total supply may differ from the maximum supply, which refers to how many coins will ever exist.
- Locked tokens include tokens that exist but cannot be traded. Often, these are locked in smart contracts and will become available later.
For example, let’s say a cryptocurrency has a total supply of ten million coins. Two million are locked up and reserved for the development team, and one million are locked in a smart contract. Therefore, the circulating supply would be seven million coins.
Consider the Bitcoin circulating supply as an example. The maximum supply of Bitcoin is capped at 21 million, but not all of these coins are in circulation. At the time of this writing, about 19.85 million bitcoins exist. The remainder have yet to be mined. In Bitcoin’s case, the circulating supply closely matches the total supply.
Cardano (ADA) provides another example. However, ADA’s circulating supply of 36 billion is still well short of its total supply of 45 billion coins. Nine billion coins are not yet in circulation.
This difference between the circulating supply and the maximum supply becomes crucial in investing. Use tools like CoinGecko to monitor supply metrics. Holders should expect some level of dilution as the remaining coins are introduced into the market. Without a corresponding increase in demand, prices will likely fall.
Three Types of Supply
Let’s explore the types of supply in more detail. As introduced earlier, there are three main types of supply: circulating supply, total supply, and maximum supply.
As we’ve discussed, circulating supply refers to the number of coins or tokens currently available for trading. This is the supply that can be actively bought and sold on the market.
Total supply, on the other hand, refers to the total number of coins or tokens currently in circulation. This metric includes those that are locked or reserved. Coins held in wallets, as well as those locked in smart contracts or reserved for future use, represent part of the total supply. Total supply also takes into account burned tokens, which are coins that have been intentionally removed from circulation.
Maximum supply refers to the total number of coins or tokens that will ever exist. For example, Bitcoin’s current supply is around 19.85 million, but the maximum supply is capped at 21 million.
The connection between these types of supply is important to understand.
- Circulating supply is a subset of the total supply, as it only includes coins that are currently available for trading.
- Total supply, in turn, is a subset of the maximum supply, as it only includes coins that currently exist.
- Maximum supply refers to the number of coins that will ever exist.
For instance, the XRP circulating supply is currently around 58 billion, but the total supply is also around 100 billion, with the remaining 42 billion XRP locked in escrow.
By contrast, the Dogecoin circulating supply grows by 5 billion coins annually.
Current supply affects current trading. However, also weigh total and maximum supply when making informed investment decisions. These will affect the supply in the future.
Why Circulating Supply Matters
Circulating supply provides a helpful metric but is also used to calculate other metrics, such as market capitalization (market cap). A coin’s market cap refers to its current market value (not the price).
To calculate the market cap, multiply the current price by the circulating token supply.
For example, Cardano has a current supply of 36 billion tokens. At the current price of about $0.64, ADA has a market capitalization of $23 billion.
However, about 20% of the tokens from the maximum supply are yet to be released. Fortunately, we have a metric to measure this as well. Fully diluted market cap considers the total value of the project by multiplying the maximum supply by the current price.
Early in the release cycle, the disparity between circulating supply and maximum or total supply can create market inefficiencies. Demand may outstrip supply, spiking the price. Later, as more supply comes to market, prices may fall without an increase in demand.
- A high circulating supply can lead to a surplus of coins or tokens on the market, putting downward pressure on the price.
- On the other hand, a low circulating supply can lead to a shortage, causing prices to surge, sometimes unrealistically.
Circulating supply can also provide insights into liquidity and inflation dynamics.
For example, a low circulating token supply may make trading less efficient. Expect more slippage, meaning a larger difference in the expected trade value versus the actual trade value.
Looking forward, however, you can also compare the circulating supply to the maximum or total supply to predict future price moves. For example, if 50% of the supply is locked but will unlock in 60 days, expect prices to come down as the circulating supply suddenly grows by 50%. However, if the total supply is already circulating, that may be bullish.
Changes in Circulating Supply
The circulating supply of a cryptocurrency can change due to various factors that cause increases or decreases. Let’s explore how the circulating supply can change to understand the effect on market dynamics better.
Increases in Circulating Supply
The circulating supply increases when new coins or tokens are added to the market. This can happen through various mechanisms, such as mining, minting, or token generation events (TGEs).
- Mining is the process by which new coins are created and added to the blockchain as a reward for validating transactions. For example, the supply of Bitcoins circulating increases as new bitcoins are mined and added to the market.
- Minting refers to the process of creating new tokens, often used in stablecoins or other types of cryptocurrency. The Ethereum protocol mints new ETH tokens to reward stakers.
- TGEs, sometimes in the form of initial coin offerings (ICOs), are events where new tokens are created.
Decreases in Circulating Supply
The circulating supply decreases when coins or tokens are removed from the market. Common causes include token burns, lost tokens (which are difficult to track), or coins locked in smart contracts.
- Token burns refer to the process of intentionally removing tokens from circulation, often used to reduce the supply and increase the value of the remaining tokens. Earlier, we mentioned how Ethereum mints new tokens to reward validators. However, the protocol also burns base fees for transactions, expanding the supply by minting and decreasing the supply with burns.
- Lost tokens, on the other hand, refer to coins or tokens that are no longer accessible due to various reasons, such as forgotten passwords, lost private keys, or destroyed devices. This metric, however, is difficult to pinpoint with any accuracy.
- Locking tokens in smart contracts also decreases the circulating supply. For example, a time-lock vault can take tokens off the market for two years until the contract expires. Some locks use a linear unlock instead, gradually releasing the locked tokens.
On many proof-of-stake chains, staking also reduces the circulating supply. Users lock their tokens in a smart contract to earn a yield. However, these “locks” vary in duration and may not have a meaningful impact on longer-term prices.
How Circulating Supply Impacts a Crypto’s Price
One key factor that influences the price of a cryptocurrency centers on scarcity, but only as it relates to demand. If there’s only one of something, it’s scarce. However, if nobody wants it, it’s worthless.
When the circulating supply of a cryptocurrency is low (and there is growing demand), this can create a sense of urgency to buy. Prices rise, sometimes dramatically.
Supply Change Triggers
Let’s examine some key events that can impact crypto prices due to changes in supply.
- Block rewards and halving events: Bitcoin rewards miners with a block subsidy. These newly minted bitcoins increase the supply. However, the Bitcoin protocol halves the amount of new bitcoins about every four years. Reducing the block reward by half reminds the market of Bitcoin’s scarcity. Historically, the Bitcoin halving has led to market-wide bull runs.
- Presales and token generation events (TGEs): New launches often create a speculative frenzy. However, investors should also weigh the overhanging supply. In many cases, only a small percentage of tokens are available at launch. The rest will come to market later.
- Token burns: The intentional removal of tokens or coins from circulation can reduce the supply and increase the value of the remaining tokens.
Ethereum uses both minting and burning in its supply mechanics. The Ethereum protocol mints new tokens as staking rewards and burns a similar number of tokens collected as base fees. These two opposing actions result in a modest growth in the ETH’s supply.
However, Bitcoin best demonstrates how a limited supply affects market price. Other factors, such as market share, have a greater effect on competing altcoins like Ethereum and Solana. Bitcoin enjoys a unique leadership position in the crypto space and often drives the rest of the market.
While the circulating supply is a crucial piece of the puzzle, it must be viewed in context. Current supply, combined with demand, often dictates the price direction. However, it’s also essential to consider the future supply. Metrics like total supply and max supply help keep the circulating supply in proper perspective. Lastly, weigh the competitive landscape, which affects demand. Competing projects could make the circulating supply less meaningful if they take market share.
References:
- ESTABLISHMENT OF THE STRATEGIC BITCOIN RESERVE AND UNITED STATES DIGITAL ASSET STOCKPILE (whitehouse.gov)
- Number of Cardano (ADA) tokens in circulation (statista.com)
- Dogecoin Inflation (dogecoin.com)
- How to stake your ETH (ethereum.org)
- ETH supply (ultrasound.money)
FAQs
What is circulating supply in crypto?
Circulating supply is the amount of cryptocurrency that’s available for trading on the market. This metric excludes coins or tokens that are locked or held in reserve.
What is the difference between circulating supply and total supply?
Total supply represents all existing coins or tokens, whereas circulating supply only includes those that are currently available for trading.
How does circulating supply impact a cryptocurrency’s price?
Circulating supply can impact a cryptocurrency’s price by influencing the balance between supply and demand. When supply is low and demand is high, prices tend to rise.
Is high circulating supply good?
Not necessarily. A high circulating supply can lead to a surplus of coins or tokens on the market, which can put downward pressure on the price. However, higher liquidity from a larger circulating supply can lead to more efficient trades.
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