Understanding Circulating Supply in Crypto

What Is Circulating Supply?

Circulating supply represents the total number of cryptocurrency tokens or coins that are publicly available on the blockchain and can be transferred freely between wallets. For example, as of this writing, the circulating supplies of major cryptocurrencies include approximately 18.98 million BTC, 120 million ETH, and 81 billion USDT. These figures reflect the tokens currently accessible for trading, rather than the total units that might exist.

Interestingly, even coins that are seemingly inactive can be considered part of the circulating supply. For instance, Bitcoin owned by its mysterious creator, Satoshi Nakamoto, remains untouched for years but is still classified within Bitcoin’s circulating supply.

Circulating Supply vs. Total and Max Supply

A fundamental distinction exists between circulating supply, total supply, and max supply:

• Circulating Supply: Coins actively traded and accessible in the market.
• Total Supply: The total number of coins in existence, including those locked, reserved, or otherwise unavailable for trade.
• Max Supply: The absolute limit on the number of coins that can ever exist, often set programmatically, as with Bitcoin’s cap of 21 million.

Understanding these distinctions can reveal insights into a cryptocurrency’s distribution model and economic structure.

Importance of Circulating Supply

1. Market Capitalization

Circulating supply is integral to calculating a cryptocurrency’s market capitalization, one of the most widely used metrics for assessing a crypto asset’s market size. Market capitalization is computed by multiplying the current market price of a cryptocurrency by its circulating supply. For example:

Market Cap=Price×Circulating Supply\

2. Distribution Transparency

A large circulating supply often indicates broader distribution, reducing the risk of price manipulation by “whales,” or large holders. Conversely, a smaller circulating supply could suggest centralization, scarcity, or potential for higher price volatility.

3. Supply and Demand Dynamics

The relationship between circulating supply and market demand influences cryptocurrency prices. For instance, a smaller circulating supply might lead to higher prices if demand is strong, as seen with Bitcoin’s relatively limited supply.

Examples of Circulating Supply in Action

• Bitcoin: Though Bitcoin’s max supply is 21 million, its circulating supply is less due to unmined coins and lost wallets. These lost Bitcoins provide a clearer picture of the actual availability in the market.
• Litecoin: Litecoin has reached its max supply of 84 million coins, meaning all LTC has been mined. Even with max supply reached, its price fluctuates with market conditions. For instance, Litecoin’s price hit an all-time high of $386 during the 2021 bull market but dropped to $50 in the subsequent bear market.

Challenges and Misconceptions

Investors must approach circulating supply critically, as certain projects might artificially lower their circulating supply to create an illusion of scarcity. Additionally, vesting schedules for team members and advisors might gradually increase the circulating supply over time, affecting market dynamics.

What Happens When Circulating Supply Equals Max Supply?

When circulating supply matches max supply, all coins have been released into the market. While this does not inherently signify drastic changes, price movements will continue to depend on market conditions, investor behavior, and overall demand.

For example, with Litecoin’s circulating and max supply equal at 84 million, market trends still dictate its price. This highlights the interplay between supply and external economic factors in cryptocurrency valuation.

Conclusion

Circulating supply is a vital metric for understanding the availability, distribution, and value of a cryptocurrency. By providing a clear picture of coins in the market, it aids in evaluating market capitalization, assessing distribution, and understanding the token’s economic potential. However, investors must remain cautious of projects manipulating their supply metrics and consider other factors, such as demand and market conditions, in their investment decisions.