- Cryptocurrency supply is how many coins will exist at any given time, and is made up of circulating, maximum, and total supply.
- These metrics are important because they allow investors to determine the distribution of tokens, the demand for the asset and the market capitalization.
- The metrics referring to the supply of cryptocurrencies are part of what is known as the ‘Token Economy’ or ‘Tokenomics’.
Almost everything in this world is governed by the law of supply and demand, so understanding what the supply of cryptocurrencies is is essential to determine this type of metric, as well as the market capitalization.
One benefit of blockchain technology is that it allows cryptocurrencies to provide an immutable and transparent record. This allows users to access the information necessary to understand what the supply of a token or cryptocurrency looks like.
So what is it the supply of cryptocurrencies? C.It consists of how many currencies will exist at any given time, and per se, The supply of a cryptocurrency is made up of the circulating, maximum and total supply. Each of them provides fundamental information on the currency and the economy of the asset.
Understanding what the supply of a cryptocurrency consists of
Cryptocurrency supply metrics are essential for the investor when determining token distribution, demand for the asset, and market capitalization..
Therefore, it is essential to understand the type of information that each of the supply metrics offers us. Below is a brief explanation for each:
supply in circulation
Circulating supply is the amount of cryptocurrency that is available on the market at any given time for trading.
This particular supply is the one that sIt is used to calculate the market capitalization of a cryptocurrency.., i.e. the fiat currency value of the coins that have been mined and It is obtained by multiplying the circulating amount of the cryptocurrency by the value of each one.
For example, according to CoinMarketCap, Bitcoin’s market capitalization at the time of writing is $317.9 billion, its price is $16,545, and its circulating supply is just over 19.2 million BTC. So if you multiply the circulating supply by the price of BTC you will get the market capitalization of the cryptocurrency. This metric reflects the size of the token economy.
Nevertheless, something to keep in mind is that a portion of the circulating supply of BTC is not really available in the crypto market. There are millions of BTC that were mined in the early years and haven’t moved since. This is why there is a sub-metric of market capitalization that does not include coins that have been lost or are inactive and is called ‘Realized Market Capitalization’.
An additional question regarding the circulating supply is: Why is it increasing or decreasing? In the case of cryptocurrencies with a fixed supply, that is, they have limited the number of tokens that will be produced, the circulating supply is only increased through mining.
While, on the contrary, cryptocurrencies that do not have a supply limit can then increase the supply in circulation through minting, in a process similar to that of the central bank, and precisely in these cases the supply in circulation can decrease as a consequence. of burning tokens, in a process also similar to that of a central bank.
Total supply of cryptocurrencies
The concept “total supply of cryptocurrencies” refers to the total amount of cryptocurrencies that exist on the blockchain but are not in circulation.
This can happen, for example, when there is a portion of tokens on the chain that will go towards staking rewards. These tokens technically exist on the blockchain but are only distributed when certain conditions are met.
In the case of tokens that use the burning process, it is important to note that these “burned” coins are not counted in the total supply.
Maximum offer or supply
Maximum offer or supply refers to the total number of coins that can be minted. This feature is one of Satoshi Nakamoto’s contributions that he incorporated into Bitcoin.
Bitcoin has a maximum supply of 21 million BTC and this is so because there is a function built into the crypto’s code that limits the number of coins that can be mined.
However, not all cryptocurrencies have a maximum supply. The most popular case is Ethereum, a cryptocurrency that, although it does not limit the maximum supply, does set a limit on the number of coins that can be minted each year. The limit is 18 million ETH per year.
In fact, as we can see in the image below, the current circulating supply of Ethereum is more than 122.3 million ETH, which is significantly higher than that of BTC, and there is no record in the “Max Supply” line.
While, for example, stablecoins usually seek to keep the maximum supply constant over time because a change could cause an imbalance between supply and demand, leading to its price fluctuating (something that obviously a stablecoin does not want to happen).
Importance of these metrics
The metrics referring to the supply of cryptocurrencies are part of what is known as the ‘Token Economy’ or ‘Tokenomics’.This term refers to those characteristics of a cryptocurrency that allow a sustainable economic ecosystem to develop.
Precisely due to the law of supply and demand, the supply of a token can influence its price since it is the supply side of the equilibrium equation.
These characteristics acquire greater analysis appeal when it comes to cryptocurrencies that do not have a fixed supply. Any change in the supply of an asset without a commensurate change in demand can lead to upward or downward pressure on the price. In fact, as previously mentioned, this is the case with fiat currencies as well.
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