max, circulating, and total supply explained

What role does cryptocurrency supply play in shaping the value and scarcity of digital assets?

The key feature of most crypto assets is their unique supply mechanisms, which differ greatly from fiat currencies.

Unlike fiat currencies, which are issued by governments and central banks and can be minted at will, most cryptocurrencies are generally designed with a fixed token supply schedule. This means that the total number of coins or tokens that will exist is predetermined and cannot be changed once the cryptocurrency is launched.

As a general rule, crypto assets are decentralized and often have predetermined issuance rules.

These rules determine the total amount of a cryptocurrency to be created (maximum supply), the amount currently in circulation (cryptocirculating supply), and the total amount in existence (total supply).

These metrics play a crucial role in determining a cryptocurrency’s scarcity, inflation rate, and ultimately its value.

Let’s delve deeper into these concepts and explore their importance, how they differ, and why they are important.

What is the cryptocurrency supply?

Cryptocurrency supply refers to the total number of coins or tokens that will be created for a particular crypto.

What is the maximum supply of cryptocurrency?

The maximum supply of a coin or token refers to the total number of coins that can be minted or minted, including minted or unmined coins.

For example, the maximum supply of Bitcoin (BTC), the first and most well-known cryptocurrency, is limited to 21 million coins. This scarcity is one of the key characteristics that gives Bitcoin its value, as it is designed to mimic the scarcity of precious metals such as gold.

Dogecoin (DOGE), another well-known cryptocurrency that started as a joke based on the “Doge” meme, has an interesting approach to maximum token supply.

Unlike Bitcoin, Dogecoin has no maximum supply limit. Instead, it initially started with a supply limit of 100 billion coins, but this limit was removed in 2014 and Dogecoin became an inflationary crypto with an ever-increasing supply of crypto tokens. As of May 6, DOGE has a supply of over 144 billion tokens.

Dogecoin circulating supply | Source: Messari

Another example is Ethereum (ETH), the second largest cryptocurrency by market cap. Ethereum has a non-limited maximum supply, which means new Ethereum tokens can be created indefinitely.

What is the total supply of cryptocurrency?

The total supply includes all tokens or coins created for a crypto. This includes actively circulating coins as well as coins that are not in circulation.

Uncirculated coins may be reserved for specific purposes, such as staking rewards, or kept under lock and key or vesting periods after a private sale or ICO. These tokens technically exist on the blockchain but are not actively traded or available in wallets.

For example, a project may create more tokens than are initially distributed to the public and reserve some for future use. These additional tokens can be used for a variety of purposes, such as incentivizing network participants or funding ongoing development.

The total supply also includes coins that were burned or destroyed. Burning coins involves sending them to an address for which no one has the private key, effectively removing them from circulation permanently.

This may be done as part of a coin burning event, where a portion of the total supply is deliberately destroyed to reduce the total supply of crypto tokens and potentially increase the value of the remaining coins.

What is the circulating supply in crypto?

Circulating supply refers to the number of coins or tokens currently available and in circulation in the crypto market. This figure may differ from the total supply as not all cryptocurrencies are actively traded or accessible.

For example, if a crypto’s total supply is 100 million coins but there are only 50 million coins in circulation, the crypto’s circulating supply will be 50 million.

Bitcoin circulating supply | Source: Glassnode

Circulating supply plays an important role in determining the market value of a crypto asset; This is calculated by multiplying the current price of the coin by the circulating supply.

High circulating supply and low demand can lead to lower prices, while low circulating supply can create shortages and increase prices.

Total supply and maximum supply

What is the difference between maximum supply and total supply? Maximum supply is the total number of tokens that will ever be created or minted for a given crypto; This includes all coins that have been created, will be created, or will be created, released, burned, or lost.

The total supply does not include burned tokens and represents the actual amount of cryptocurrency available.

Once the maximum supply for mineable cryptocurrencies is reached, no more coins or tokens will be produced. This feature contributes to the perceived scarcity and value of the cryptocurrency.

It’s important to note that while Bitcoin has a fixed maximum supply, most cryptocurrencies do not. Many cryptocurrencies have a maximum supply that can change over time, increasing or decreasing depending on protocol rules.

Circulating supply and token supply

Now let’s examine the difference between circulating supply and total supply. Total supply represents the maximum number of coins or tokens that will be available for a cryptocurrency, while circulating supply refers to the coins that are currently in circulation and available for trading.

The circulating supply excludes coins that are locked up or held in reserve and focuses only on coins that are actively held by the public.

Only circulating supply is typically taken into account when calculating market capitalization, an important metric for investors. This is because market prices of a cryptocurrency are primarily influenced by actively traded coins, rather than those that are locked or reserved.

As a result, the circulating supply provides a more accurate reflection of current market conditions and a cryptocurrency’s liquidity.