Circulating supply refers to the amount of a stock or currency that is on the market. This is different from but related to, other measurements of tokens supply. When we are talking about “circulating supply” we are talking about how much of a currency or altcoin is available on the market. This relative amount will express important information about its worth. Also important to cryptocurrency circulating supplies are other measurements of tokens. As such this article also briefly explains: initial token supply, current supply, and total token supply.
To best understand how cryptocurrency circulating supply works, it is helpful to have a basic understanding of inflation and scarcity. When we talk about circulating coins, we are talking about what amount of coin is available on the market. Inflation and scarcity are therefore important to circulating supplies because the circulating coins are in many ways a representation of the value of a currency.
So we are not just concerned about the total amount of a currency, we are concerned with value. When thinking about the importance of circulating supply in terms of your investments, it is important to remember that more is not always better. The quality of the currency is as important as the quantity.
Because we are talking about circulating supply, we will also talk about “burning” and how this is used as a method to control the circulating supply.
Terms to Understand Circulating Supply of Cryptocurrency
- Initial Token Supply: The initial supply is the number of tokens in circulation when the tokens are first traded on the market; typically through a crypto exchange, like Binance. The supply of an initial token is useful to know. This count gives the investor an idea of what kind of rate a new token might be released on to the market at. This is especially relevant when dealing with ICOs and IEOs.
- Current Token Supply: Current token supply is how many tokens are in circulation at a specific time. This is not a stagnant number, as most currencies participate is some kind of mining, which means that the current supply will increase, and so is not the total future supply.
- Total Token Supply: Unlimted Supply v. Maximum Supply: Total token supply depends on if there is an unlimited supply, like Ethereum’s Ether, or a maximum token supply, as Bitcoin is designed.
- Burnt tokens: Burnt tokens are tokens that are removed from the market completely. “Burning” occurs by sending a number of tokens to an address that no one has a private key to.
- Minted Tokens: Minted tokens refer to any legitimate token of a currency. It is much like a central bank minting a coin. It is a legitimate currency. For cryptocurrency, however, mining refers to tokens that have been created or tokens that have been mined and confirmed. Some minted tokens are mined by a decentralized network, like Bitcoin, while others are pre-mined, like Ripple’s XPR. Minted coins are not necessarily in circulation. This is because coins can be burnt.
- Market Capitalization: Market capitalization of a cryptocurrency is the amount of demand for the asset. A market cap can be a good indication of how strong a currency is. The increase or decrease of a coin is the result of the demand or lack thereof.
Inflation and Deflation
When there is a sudden increase of a coin on the market, this does not usually indicate that the coin is more valuable. This is how inflation and deflation work in the crypto-market. Just like a fiat currency, if a country just prints its currency, rather than increase its value through resources and securities, it devalues the currency. This is because the country has more money, but it has not happened organically, so the increase in money just means that the same goods will need more of that currency to pay for things. When a market is working, supply and demand work for one another, not against.
Inflation adds more of a currency to the market, which is done so that there is more of the currency that costs less. Investors can, therefore, purchase it more easily. But to cause deflation, some of the currency needs to be taken off the market. Deflation increases the scarcity, as there is less of it, and it is harder to get. The intention is to increase the value of a coin.
A deflationary tactic for cryptocurrency is burning coins. This means that coins are sent to an inaccessible address. So coins are obviously not literally burned, rather are taken out of use. Recently, the cryptocurrency mining firm Antpool announced that it had burnt 12% of the bitcoin cash coins it receives as block rewards for validating transactions to unobtainable addresses. The rationale is that a large pool like Antpool is slowing the inflation rate for BCH to potentially increase its value on the market.
Burning coins may not be the panacea to the problems caused by the flood of coins to the crypto-market however. Although Satoshi Nakamoto set a limit on Bitcoin, there have been several very successful forks; like bitcoin cash and bitcoin gold. So although Bitcoin is capped at 21 million, we do not know what effect exactly these other currencies will have on the market in the long term.
Basically, we are dealing with the ever-present problem of manufacturing market value, versus more substantially developed value.
The Importance of Circulating Coins
Let’s get back to cryptocurrency circulating supplies then. All the circulating supply is, is the number of minted coins of a currency in use on the market. That means it is bought, sold, traded and used to purchase goods and services. But circulating supply is relevant to the value of a currency for many reasons, which is why it’s useful to understand what the above terms mean first.
Here’s why; the basic nature of the market is supply and demand. But demand is not something that can be simply manufactured. That means that when we see an increased supply of a currency, investors must ask why that has appeared on the market. Especially for cryptocurrencies! Because so many coins are ICOs backing new companies, there needs to be an explanation of why there was an increase in coins on the market, and more coins is not necessarily a positive sign, it could indicate a bubble. It could also mean that the company is not around for long, and they are just trying to sell off their coins to make a quick buck.
But when we compare the pump and dumps to strong currencies like Bitcoin and Ether, we can easily see why these coins have demonstrated longevity. Bitcoin, like gold, is valuable and people want to sell and exchange it conservatively. On the other had Ether is required to run applications and smart-contracts on the Ethereum platform. And the Ethereum design also continues to prove its value.