Maximum Supply Explained

What Is Maximum Supply?

Maximum supply refers to the total number of cryptocurrency coins or tokens that will ever be created or mined. It is a fixed limit, and once the maximum supply is reached, no new coins or tokens can be generated. This is a defining characteristic of many cryptocurrencies, as it ensures scarcity and can help control inflation over time.

The maximum supply is typically set in the protocol from the very beginning (the genesis block) and can only be altered by the development team, if at all. Unlike traditional fiat currencies, which central banks can print at will, cryptocurrencies with a fixed maximum supply do not suffer from this inflationary risk, making them more attractive to investors looking for long-term value retention.

Bitcoin, for example, has a capped maximum supply of 21 million coins. Once all 21 million are mined, no more bitcoins will be created, positioning it as a scarce digital asset that many consider “digital gold.”

Types of Maximum Supply

1. Fixed Supply: The most common model, where the total supply is capped at a specific number, and no more coins will ever be minted. Bitcoin is the most famous example of a fixed supply cryptocurrency.
2. Inflationary Supply: In this model, new coins or tokens continue to be issued over time, which can gradually increase the maximum supply. Ethereum initially did not have a maximum supply, but its transition to Ethereum 2.0 introduces new dynamics like coin burning, changing the way its supply model functions.
3. Deflationary Supply: Cryptocurrencies with a deflationary supply burn coins over time, reducing the total supply. This creates scarcity and can increase the value of the remaining coins. Binance Coin (BNB), for example, performs quarterly coin burns to reduce its total supply.
4. Dynamic Supply: This model adjusts supply based on predefined parameters such as inflation, demand, or other economic factors. The goal is to make the cryptocurrency more adaptable to changing market conditions.

What Is Total Supply?

Total supply refers to the total number of coins or tokens that have been created or mined, including those that are in circulation, reserved, or locked. This metric helps understand the overall availability of a cryptocurrency. Unlike maximum supply, which sets a cap, total supply can increase over time as new coins are mined or tokens are issued.

In many cryptocurrencies, some tokens are locked away, held in reserve, or vested over time, which prevents them from circulating immediately. For example, Ethereum (ETH) does not have a fixed total supply, and its issuance model has evolved over time with mechanisms like coin burning introduced to control its supply growth.

Total supply also excludes any tokens that have been permanently destroyed through a process known as crypto burning, where tokens are sent to an inaccessible wallet, reducing the overall supply.

Total Supply vs. Circulating Supply

While total supply includes all coins or tokens in existence (including those locked away or reserved), circulating supply only counts those that are available on the market for trading. This distinction is crucial because the circulating supply is what primarily influences a cryptocurrency’s market capitalization, as the price is determined by the coins that are actively traded.

For example, Tether (USDT) has a circulating supply of over 83 billion coins, but its total supply exceeds 86 billion, reflecting the tokens that are locked up or reserved.

Maximum Supply vs. Total Supply

While maximum supply represents the upper limit of a cryptocurrency’s supply, total supply is the number of coins that have been created or mined, whether in circulation or reserved. Once the maximum supply is reached, no more coins can be issued. For Bitcoin, the maximum supply is fixed at 21 million BTC, with its total supply currently at just over 19 million BTC.

This difference is important because it helps investors assess a cryptocurrency’s future inflation rate. A cryptocurrency with a capped maximum supply (like Bitcoin) may be seen as more stable or less prone to devaluation through excessive issuance compared to one with an uncapped total supply.

Conclusion

In conclusion, understanding the nuances of maximum supply, total supply, and circulating supply is essential for anyone looking to invest in or use cryptocurrencies. These metrics influence not only the value and scarcity of a digital asset but also its long-term viability. A fixed maximum supply creates scarcity, while a growing total supply can lead to inflation. By keeping track of these figures, investors can better understand the potential risks and rewards associated with a particular cryptocurrency.