The circulating supply of cryptocurrency is equivalent to the outstanding shares of a publicly traded company. This metric counts the number of coins available for trading versus the number of max coin supply.
The circulating supply helps us calculate the market cap of each coin. In addition, regulation of scarcity mitigates demand and impacts the price of the coin. Cryptocurrencies vary in their circulating supply approaches, making it important to understand these concepts.
Crypto Circulating Supply Investigated
Let’s say you want to buy ADA coins for Cardano staking. There is 33.75 billion ADA available across all centralized and decentralized exchanges. This is the circulating supply of ADA at 75% of the maximum supply of 45 billion ADA. In turn, we can calculate the market cap of ADA by multiplying this circulating supply by the price of each ADA coin.
33.75 billion ADA (circulating supply) x $0.45 (per ADA) = Cardano (ADA) market cap of $15 billion
If we multiply the maximum supply of ADA by the price of each ADA token, we get the market value of all ADA tokens that will ever exist at $20 billion. This does not take into account the circulating supply, which is why we call it the fully diluted market capitalization.
In traditional finance, a company’s fully diluted market capitalization would count all dilutive securities such as warrants or options that could be converted into shares. Therefore, in both the crypto and stock markets, a fully diluted market cap measures an asset’s maximum potential.
The circulating supply measures the present value of the asset. However, it should be noted that different rules apply to blockchain assets. For example, if a user loses their private keys to a wallet, those funds will be locked out from trading by everyone.
Circulating Supply: More Than You Think
Everyone knows that Bitcoin has a maximum total supply of 21 million BTC. Since the launch of bitcoin in 2009, miners have gradually received bitcoins as they process transactions, meaning they insert them into the blockchain as new blocks of data. By receiving these rewards, the miners circulated more BTC.
Initially, they received 50 BTC per transaction. After three halving events, their reward is now just 6.25 BTC. This is Bitcoin’s way of mitigating demand by carefully managing the circulating supply. In traditional economies, central banks control the supply of currencies like the US dollar by printing banknotes and interest rates.
The circulating supply, be it fiat money or cryptocurrency, has an important function of controlling inflation. In the case of Bitcoin, 19.1 million BTC were mined, which is about 91% of the total supply of 21 million. However, does that mean that all of those 19.1 million BTC are available for trading?
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no Crypto wallets provide access to blockchain networks as they contain private keys to unlock that door. With lost keys, access is lost. These funds, in turn, are irretrievable. In 2017, a Chainalysis report estimated that up to 3.79 million BTC are lost, mostly forgotten on long-defunct hard drives.
Furthermore, it is estimated that Satoshi Nakamoto (the creator of Bitcoin) owns around 1M BTC that has never been moved to a wallet/exchange. Overall, this would bring the actual circulating supply of Bitcoin to 14.3 million. This in turn gives cryptowhales immense power to influence the price of Bitcoin.
If Nakamoto or someone recovering a lost private key suddenly released 1M BTC into the circulating supply, the price of the token would drop. This is because there would be more bitcoins on the market than there is demand.
Other methods to optimize circulating supply
While Bitcoin has embedded inflation control logic through its halving mechanism, other blockchain networks are more flexible, for better or for worse. This refers to Proof-of-Stake (PoS) blockchains like the upcoming new version of Ethereum, Cardano or Avalanche.
Native coins on these networks serve multiple functions. Not only can they be used to pay for dApp services like lending or NFT trading, but they are also used for staking. PoS players can become validators to receive rewards when their coin/token stake is used to add transactions. This is the mechanism by which new coins are introduced into their circulation, just like bitcoin miners.
However, token holders in PoS networks can also use their tokens to vote on the level of rewards each validator will receive. This, in turn, regulates the circulating supply, which affects the price of each token. Case in point, when Ethereum rolled out its EIP-1559 upgrade, base ETH gas fees were burned instead of being returned to miners.
Since Ethereum does not have a maximum ETH supply, this burning mechanism (sending ETH to a dead wallet) regulates the circulating ETH supply by reducing the inflow of new ETH. As a result, Ethereum’s inflation rate surged from 1.10% to 0.51% in Q1 2022. That’s quite a difference from the 40-year high US inflation rate in the first half of 2022, isn’t it?
For Ethereum investors, this means that ETH is increasing in value. Finally, Ethereum hosts thousands of dApps and has half a dozen Layer 2 scalability solutions. As the utility of Ethereum increases, the demand for ETH will increase. In other words, a more regulated circulating supply of Ethereum via the EIP-1559 upgrade values ETH.
In contrast, PoS blockchains, which do not have a burn mechanism but have a maximum token supply, can always regulate their circulating supply by changing the validator rewards. For Avalanche (AVAX), which is capped at 720M AVAX, the validator staking reward is at an annualized rate of 9.02% AVAX.
If the Avalanche ecosystem receives less benefit, AVAX token holders can then vote to reduce that stake reward. This would reduce the circulating supply as fewer new AVAX would enter the market. This would then increase the AVAX coin price accordingly.
This is another important aspect of the circulating supply – the token price expressed in decimals. Research has shown that investors tend to choose cheaper coins. Dogecoin is the best example of this dynamic.
Despite the fact that DOGE’s circulating supply is infinite at 5.5 billion per year because the price is so low, and with some help from Elon Musk, DOGE memecoin has a larger market cap than a legitimate infrastructure coin like AVAX with its capped max Offer.
Know your circulating supply metric
Given these examples, it is now easy to understand why the circulating supply is so important to the final value of the token. If more people understood this metric, it would be highly unlikely that DOGE would ever go above $1M let alone $1B market cap.
Always research what the purpose of each coin is, how its circulation is regulated, and how the tokens are distributed to affect circulation. These are the key drivers that determine their value, regardless of bear and bull cycles.
Disclaimer for the series:
This series article is for general guidance and information only for beginners participating in cryptocurrencies and DeFi. Nothing in this article should be construed as legal, business, investment or tax advice. Consult your advisors for all legal, business, investment and tax implications and advice. The Defiant is not liable for lost funds. Please use your best judgment and exercise due diligence before interacting with Smart Contracts.