If you’re into cryptocurrency, you must have come across the concept of circulating supply. But what is it, and why does it play such an important role in determining a cryptocurrency’s market performance?
Let’s cover the various aspects of circulating supply, from how it’s calculated to its impact on a crypto asset’s overall value.
What is Circulating Supply in Cryptocurrency?
Circulating supply represents the total amount of coins or tokens of a cryptocurrency that are currently available to the public for trading, use, or holding. Think of it as the real-time measure of how many tokens are available for transactions at any given moment.
Example: Take Bitcoin as an example. Out of its maximum supply of 21 million coins, around 19 million are currently in circulation. This means that 19 million Bitcoins are being traded, bought, and sold on exchanges globally, while the remaining are yet to be mined or are locked in reserves.
A cryptocurrency with a low circulating supply and high demand can see a significant increase in price. This can create scarcity, increasing demand and, subsequently, the price. On the other hand, a high circulating supply with lower demand may result in a stagnant or declining price.
How is it Determined?
Circulating supply is not a fixed number. It’s calculated based on the total number of coins that are available to the public minus any that are locked, burned, or otherwise restricted.
To break it down:
- Coins in Circulation: These are the tokens held by the public and are available for trading or usage in decentralized applications (dApps).
- Locked or Reserved Coins: Some cryptocurrencies lock a portion of their supply for founders, developers, or future use. These tokens aren’t part of the circulating supply until they are released.
- Burned Tokens: Some projects “burn” tokens, meaning they are permanently removed from circulation. These tokens no longer count towards the circulating supply.
Example: When Ethereum introduced the EIP-1559 upgrade, a portion of the gas fees started to be burned, reducing its overall circulating supply over time.
Suppose a new cryptocurrency with a total supply of 100 million tokens. If 30 million tokens are reserved for development and 20 million are burned, the circulating supply will be just 50 million. As these remaining tokens become scarce, demand could push prices higher.
What is the Difference Between Circulating Supply and Total Supply?
Let’s see how it differs from the total supply.
| Aspect | Circulating Supply | Total Supply |
| Definition | Number of coins available for public use. | Includes circulating supply and coins that are locked or reserved. |
| Availability | Only coins currently available for trading. | Includes both available and non-available (locked or reserved) coins. |
| Snapshot | Provides a real-time view of what’s happening in the market right now. | Represents the entire supply of coins that have been created, regardless of whether they are in use. |
| Relevance for Investors | Essential for short-term trading and market liquidity analysis. | Useful for understanding the long-term potential and future coin availability. |
Example: Ripple (XRP) has a circulating supply of around 53 billion, but its total supply is 100 billion. A large portion of XRP is held in escrow, which is gradually released into the market. As these tokens are released, the circulating supply increases, potentially affecting the market price.
Note: Keep in mind that as more tokens from the total supply are released into circulation, the price could be diluted if demand doesn’t grow proportionately.
Why is Circulating Supply Used in Determining Market Capitalization Instead of Total Supply?
The reason is simple: Using the total supply would be misleading because it includes coins that are not yet available to the public, such as locked or reserved tokens. These coins don’t impact the market until they are released.
Consider a scenario where a new project has 10 million tokens in circulation and a total supply of 50 million. If the circulating supply is used to calculate market cap, you get a much more accurate representation of the coin’s current market value. If you used the total supply, you’d overestimate the project’s worth, which could mislead investors.
Bottomline
Knowing what is circulating supply in cryptocurrency is important for evaluating a coin’s market position and price potential. It provides a snapshot of how much of a cryptocurrency is currently available for use, influencing both price and market cap.
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Frequently Asked Questions
1. Can the circulating supply of a cryptocurrency change over time?
Yes, it can change over time due to various factors like new tokens being minted, coins being locked, burned, or released from reserves.
2. Is circulating supply the same as liquidity?
No, circulating supply and liquidity are not the same. Circulating supply refers to the number of coins or tokens available in the market, while liquidity refers to how easily these coins can be bought or sold without affecting the price.
3. What happens to the price when coins from a total supply are released into the circulating supply?
When coins from the total supply are released into the circulating supply, it can dilute the value of the cryptocurrency, especially if demand does not increase proportionately.
4. Does the circulating supply include tokens locked for staking?
No, tokens locked for staking or reserved for specific purposes (such as development funds or team rewards) are not considered part of the circulating supply. These tokens only become part of it once they are unlocked and made available for trading or use by the public.
