What is circulating supply?
When it comes to deciding which cryptocurrency to invest in, numerous aspects of the project need to be considered. Whilst many focus solely on its price movements, experienced investors carry out extensive research about the project, for example, they research the project's goals, technology and their tokenomics.
One of the basic aspects of a coin or token that you should consider is the circulating supply. This guide will focus on explaining what circulating supply is, why it matters, and how it changes.
What is the circulating supply in crypto?
Circulating supply is a term that refers to the number of coins or tokens that are in circulation. Being in circulation means that they are publicly available and that they are circulating in the market. These coins/tokens are either in possession of exchanges, other crypto users, or even companies.
In layman's terms, these are coins that are out there, that can be used at any point in time. Some of them might be locked up temporarily in private wallets or smart contracts. However, it is possible for them to find their way back into the open market.
Three types of supply
When it comes to cryptocurrencies, there are three types of token supply. All of which have slightly different definitions.
Circulating supply, as mentioned, refers to the coins that are accessible to the public. Alternatively, there is total supply, which in some cases, is the same figure as the circulating supply. This metric includes all the tokens that were created since the project’s launch. However, unlike circulating supply, this also includes coins or tokens that were burned after their creation.
Then there is max supply. This refers to all the coins or tokens belonging to some cryptocurrency that can ever exist. This includes all the circulating coins, burned coins, as well as those that were not released yet. Since most cryptocurrencies are capped to a specific number of tokens, this number represents that cap.
Circulating supply, total supply and max supply examples
When it comes to Bitcoin (BTC), its max supply is 21 million coins and since none of them have been burnt, Bitcoins circulating and total supply are the same. At the time of writing, 18,342,431 BTC are circulating the market. However, since Bitcoin is releasing 6.25 BTC every 10 minutes for every solved block, this changes constantly. Its circulating and total supply will continue growing until they match the max supply. When this happens, all coins will be considered to be “in circulation.”
Alternatively, let’s take a look at Cardano (ADA). This is an example of a project that is burning its coins, meaning that all three supplies are different. Cardano’s circulating supply at the time of writing is 34,766,119,444 ADA, these are the coins that are in circulation. Whereas its max coin supply is 45 billion, this is the maximum number of ADA that can ever exist. However, Cardano’s total supply is 35,660,688,967. This means that Cardano has burned 894,569,523 so far. Again, these figures will change over time as more coins get burned and released into circulation.
Why does circulating supply matter?
Cryptocurrencies are not not backed by real-world assets of value. Stablecoins are the exception of course, but for most cryptos, they are unbacked assets. As such, they can be very volatile, meaning their price constantly changes.
One of the reasons for this is the fact that the price is determined by supply and demand. With that being said, it’s clear why circulating supply is very important. The fewer coins in circulation, the greater their value is going to be. Of course, scarcity alone is not enough — investors must have a reason for wanting the coin. It being rare is not enough for it to be wanted.
Circulating supply is also used for calculating a crypto’s market capitalization. Market capitalization, or market cap, is used for determining how “big” a crypto project is. Bitcoin, for example, is the biggest cryptocurrency by market cap, followed by Ethereum, and so on.
You can calculate Bitcoin’s market cap by multiplying its circulating supply by the price per coin. This helps determine the scale of a crypto project, and how it compares to others in the industry.
Can the circulating supply of a cryptocurrency change?
As we’ve suggested throughout this article, the circulating supply of a cryptocurrency is not fixed. Certain coins, which have a max supply and do not engage in burning, will eventually have a fixed circulating supply. For example, this will happen to Bitcoin once all of its coins are mined. However, the situation is different for coins like Ethereum, which has no max supply. The circulating supply will continue to change forever.
How does mining affect the circulating supply?
Mining or minting new coins is a way of increasing the circulating supply. Mining takes place when transactions get processed, and blocks are created. By processing transactions, miners pack them into groups which are called blocks. In return for contributing their time, electricity, and computing power, they get rewarded with crypto. This process differs depending on what consensus mechanism a cryptocurrency uses.
Once again, let’s use Bitcoin as an example. Miners process BTC transactions, pack them into blocks and receive new BTC as a reward. These are coins that were previously locked, and were a part of the max supply, but not the circulating supply. However, through the process of mining, they have become a part of the circulating supply. To make sure that transaction processing will continue, Bitcoin’s creator came up with the idea of halving.
The impact of the halving
As the name suggests, halving is a process where something gets halved. In this case, it’s crypto block rewards that are halved. Halving was invented by Satoshi Nakamoto — Bitcoin’s mysterious creator. He made the decision that Bitcoin’s block rewards would be cut in half whenever 210,000 blocks get mined.
When it was first launched, Bitcoin was rewarding miners with 50 BTC per block. However, as time passed and 210,000 blocks were mined, the amount was halved to 25 BTC. After another 210,000 blocks, it was halved again to 12.75 BTC per block, then again to 6.25. In the future, the halving will continue and rewards will get smaller and smaller. Hopefully, by then Bitcoin’s price will continue to grow, so even smaller numbers of BTC will still bring sizable rewards to miners.
Circulating supply can also be affected by token burns. Token burning is a mechanism that was introduced to reduce the project’s circulating supply. Of course, tokens do not actually get burned since they have no physical representation. Instead, they get sent into a one-way smart contract.
What happens is that developers create a smart contract where coins can go in, but cannot come out. When developers or the community vote to burn a certain amount, they lock those coins up inside the smart contract. This removes the coins/tokens from the circulating supply, locking them up forever. Meanwhile, the circulating supply gets smaller, which means that there is now less supply for the same demand.
The process of burning tokens is an effective way to control the supply of tokens that have no max supply. It also reduces the circulating supply of tokens with an excessive max supply.
Know your circulating supply
As discussed above, the circulating supply plays a significant role in every cryptocurrency. It’s a metric that can be used to calculate a coin’s future performance, and can even be used for technical analysis.
Cryptocurrencies that have no max supply will keep pumping out new coins. If there is no token-burning mechanism in place, theory suggests, the price of that token is likely to drop as the circulating supply increases. If the demand stays the same or grows slower than supply, the value will go down eventually. The only cure for this is to conduct regular token burns and artificially control the circulating supply. Keep that in mind when planning your next long-term investment.
Is high circulating supply good?
Higher circulating supply can mean greater liquidity. However, with that being said, high supply often prevents the asset’s price from rising. The more coins or tokens there are, the lesser their value, and vice versa.
What is total supply vs circulating supply?
Total supply refers to all the coins or tokens of one crypto project that can ever exist. Circulating supply, on the other hand, only marks those coins/tokens that are in circulation. For example, Bitcoin has a total supply of 21 million, but not all of them are mined (in circulation).
What happens if the circulating supply reaches max supply?
When the circulating supply reaches max supply, it means that all the coins are out, and circulating within the market. This indicates that there will never be any new coins released. As a result, this creates scarcity, and typically, the asset’s price rises as a consequence.