The circulating supply refers to the number of tradable coins or other crypto assets available for trading in the market. The changes in the circulating supply mainly affect the crypto currency’s price.
We’ve put together this blog to explain the relationship between the circulating supply, crypto value, and related details so you don’t have to search elsewhere.
Understanding Circulating Supply
The circulating supply shows the number of crypto assets available for trade at a given time. This metric changes with the addition of newly mined or minted coins and when the crypto assets get destroyed. The higher the circulating supply, the more stable a coin will be.
For example, the circulating supply of Bitcoin is 90% of its maximum supply, which means the asset’s value will not be influenced much by new cryptocurrencies coming to the market. On the contrary, if a coin has a circulating supply of one million and a maximum supply of 10 million, it will be risky for an investor to hold the asset, as it has a dilution rate of 90%.
Why Circulating Supply Matters
In the crypto industry, possessing many altcoins instead of one BTC might seem like a win-win, but it’s quite the opposite.
While many will see exchanging one BTC for a million altcoins as a way to make a lot of money, the value of altcoins can drop suddenly or disappear from the market due to poor inflation control and by not limiting the circulating supply.
Maintaining an excellent circulating supply creates a demand for the asset among investors. On average, a circulating supply of 60 to 150 million is feasible for most cryptocurrencies.
Calculating Circulating Supply
The circulating supply can be found by dividing the market cap by the asset’s price. Let’s say Bitcoin has a market cap of $380 billion and is valued at $20,000 per coin; the circulating supply will be nearly 19 million.
The Effect of Circulating Supply on Cryptocurrency
Most early investors believe that going for a higher-priced coin is always beneficial. However, that’s not always a practical evaluation. A crypto coin can have a high price but, at the same time, a low circulating volume, making it a highly volatile investment with high risk and reward.
Let’s review the two top coins in the market for a better understanding. While Bitcoin has a circulating supply of 19 million and a unit price of nearly $20,000, Ethereum’s total supply is almost six times Bitcoin’s supply and has a lower price. Although the unit price of Ethereum is lower than Bitcoin, it doesn’t mean Ethereum is an inferior project.
Let’s review another example for further clarification. We all know Bitcoin has a maximum supply of 21 million coins. Since the currency came to life in 2009, 19 million coins have been mined. During the coin’s early years, miners were awarded 50 BTC per transaction but were gradually lowered to 6.25 BTC.
This strategy of minimizing the circulating supply assisted in mitigating demand. Conventionally, central banks control the flow of fiat currency, but in the case of cryptocurrencies, the developers are responsible for keeping the assets safe.
This controlled flow of BTC also aided in controlling inflation significantly. Pumping too many coins into the circulating supply will eventually result in a massive price drop.
Likewise, Ethereum doesn’t have a maximum supply but maintains its inflation and price using the coin burn mechanism. Ethereum is sent to dead wallets to regulate the circulating supply and reduce the flow of new coins.
Total Supply
The total supply is the number of coins on the blockchain, including the uncirculated coins. However, it doesn’t include burned coins.
Maximum Supply
The maximum supply means the total number of coins minted. For example, BTC’s max supply is 21 million coins. However, some coins don’t have a maximum supply, like Ethereum. There’s no limit on how many Ethereum coins can exist.
The maximum supply is fixed when a currency is launched and cannot be increased or decreased after the coin is launched.
Total Supply vs. Circulating Supply
Virtually every stablecoin has a cap on the total number of coins that can be minted. The total supply is embedded in the currency’s code and cannot be minted beyond this figure.
For example, the total supply of Bitcoin is 21 million while the circulating supply is 19 million, which means only 2 million coins can be minted in the future.
The circulating supply differs from the total supply as it represents the number of activities on the blockchain. If someone holds these crypto assets for long periods, these coins will still be considered a part of the circulating supply.
However, if rapid changes occur in the total supply of a coin, it can cause the asset to lose its value.
The LUNA coin is a perfect example. While the max supply of 300 million coins was already minted, the company decided to mint more, reaching over 6 trillion coins. In a matter of days, the coin’s value dropped from $80 to a few cents per coin.
Evaluating the total, maximum, and circulating supply can make evaluating the crypto market easier and understanding the price fluctuations.
How Does Coin Burning Affect Circulating Supply?
Before reading about the effects of coin burning, let’s briefly review what a coin burn is.
It’s a digital process executed by miners and coin developers to remove the coin or crypto assets from current circulation. The coins are redirected from the circulation to a burn address from where it’s impossible to retrieve them.
When a coin is sent to a burn address, blockchain explorers detect a decrease in the circulating supply, influencing an increase in the price. A famous example of coin burning is by the developers of the Shiba Inu coins, who decreased their circulating supply to make their prices stable and the project successful.
Besides decreasing the circulating volume and increasing the price, coin burn also decreases the inflation rate, making the coin more stable.
While BTC uses the halving mechanism to limit the circulating supply, other networks, and coins have developed their own mechanisms. These mechanisms are referred to as proof-of-stake blockchains.
The native coins on these networks can serve multiple functions like NFT trading, dApp services, lending, and staking. The stakes on the POS blockchain become validators when someone uses their coin or stake to add the transaction. New coins have adopted this mechanism to keep their circulating supply at bay.
However, the asset holders on the network can also influence the rewards that validators receive with transactions. This can also affect the circulating supply and the price of the asset.
These PoS blockchains lack a burning mechanism but have a max supply and regulate the circulating supply by tweaking the rewards validators receive.
Can Circulating Supply Equal Max Supply?
Eventually, for every crypto coin, the circulating supply will reach the max supply. If it happens, the crypto price will still fluctuate, depending on the market conditions, but no significant change will occur.
Litecoin is a perfect example where circulating supply equals the max supply, meaning all the Litecoins have been mined. Whether it’s a bullish market or a bearish one, the prices fluctuate accordingly.
Using Circulating Supply To Make an Investment
To gain a better perspective, find the ratio between the total and circulating supply.
The currency will be stable if more than 80% of the coins are circulated. However, if the coins in circulation are less than 50%, you can expect a higher flow of coins in the market, high inflation, and a price drop.
Increasing the circulating supply doesn’t always mean the market cap will increase. If we double the circulating supply of bitcoin, the market cap will remain the same, but the coin’s price will be down to 50%.
Generally, avoid investing or trading in cryptocurrencies with a circulating supply of less than 50%.
Is Low Circulating Supply a Good Sign?
Demand and value will increase when fewer coins are available for investors and traders. The value can increase further when the maximum supply is reached, and the circulating supply remains low.
In contrast, more coins in circulation will mean lower demand and a low price.
Conclusion
In a nutshell, the circulating supply is a crucial metric that influences the final value of a coin. Conducting research is imperative, like researching the purpose of the coin released, how its circulating supply is regulated, and how rewards and tokens are distributed.
No matter whether the market is showing an upward or downward trend, evaluating these metrics will at least let you know about the crypto asset’s true worth.
Please remember that only relying on evaluating the circulating supply when making an investment decision is never advisable. Several other market influencers and variables need to be accounted for when investing. It will take time to understand crypto market influencers, but in the end, your research will bear fruitful outcomes.
