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Saturday, December 21, 2024

Why does Circulating Supply matter to Cryptocurrencies?

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circulating supply

What is circulating Supply?

The circulating supply of cryptocurrencies may rise or fall over time. After 21 million coins have been issued, the supply of circulating Bitcoin will gradually increase. Mining generates new coins about every 10 minutes, so the gradual increase is related to this.

As defined by the crypto assets’ public ledger, the circulating supply consists of the collective amount of crypto-asset units in existence excluding project, foundation, or founder units that have not yet been sold.

A circulating supply metric’s primary value is that it makes it easier for investors to determine the price and supply of a crypto asset. As with stocks, the market capitalization of crypto assets measures their total value. Unlike traditional finance where the float has a predefined formula, and unit lockup restrictions are enforced by law, crypto-assets do not have the same restrictions as traditional finance. It is not yet widely used to enforce vesting periods based on smart contracts, even though they have the same potential as legal guidelines.

What is the significance of circulating supply?

For the first time, the value of a coin is determined by supply and demand factors – that is, people’s willingness to buy and sell a coin determines its value.

As a currency, the coin circulating supply represents the number of coins in circulation at any given moment, i.e. the total number of coins circulating at any time. Therefore, the lower the circulating supply, the higher the price.

No matter what the crypto world is like, small is good. The circulating supply of Bitcoin is 16,649,087. The Ethereum blockchain only has 95,343,248 coins. It sure looks good when you see all the new and upcoming ICOs all offering large amounts of coins in exchange for 1 ETH or 1 BTC, right? In fact, no. Their only purpose is to sell you these coins and then disappear.

There are a million coins in circulation, so getting 25,000 coins for 1 ETH sounds like a great deal. Imagine investing four Ethers and setting this coin at 10 dollars, and you’ll be a millionaire. Unfortunately, if there were so many coins, you might hold them until retirement or even longer.

It is now common for ICOs to raise money by making your dream of these figures with a weak product and concept. Trends are returning to reality. When an ICO values itself extremely low, it is now taken to be a scam ICO.

A proper valuation of any ICO is based on the budget needed to make the product successful and the amount of demand for it on exchanges. Positive news or products are needed to generate demand. Each month, hundreds of ICOs are launched, depleting the circulating supply of the coins.

Creating demand with investors depends on a healthy circulating supply. At the time of writing, the stock price of Berkshire Hathaway is $282,810. There are 465.3 billion USD in valuation and a price for 1 stock because the current supply is less. A bitcoin price of 7,000 USD is likely to be reached by the end of this year.

What is the good circulating supply?

 In general, a circulating supply of 60 Million – 150 Million is considered to be a good amount. Check out Coinmarketcap.com for a chart. The crypto world would say the price of all cryptocurrencies with less than 150 million in circulation has increased so rapidly.

When investing in any cryptocurrency ICO, look at the circulating supply. In a few months, a tiny circulating supply will look sexier in your wallet.

 Circulating Supply – how is it calculated?

It is possible that the number of coins circulating in a cryptocurrency increases or decreases over time. 

If we take bitcoin as an example, when all 21 million coins have been mined, the circulating supply must increase. As the Bitcoin network is designed, the gradual increase of coins occurs every 10 minutes until all coins have been mined.

In contrast, cryptocurrency developers also plan to reduce the supply of their coins, to increase the value and scarcity. Coin burns, or the removal of coins from the market at a specific timeframe, are common methods of permanently removing coins from the market.

A popular example is Binance’s native cryptocurrency BNB. By burning a certain amount of coins every quarter, the company will reduce its total supply by half, burning a total of 100.000.000 coins in total.

Circulating supply vs total supply – what’s the difference?

Cryptocurrencies have circulating supplies as well as total supplies. They differ in the following ways:

  • Tokens and coins that circulate on the market are known as circulating supply
  • Coins/tokens are classified as total supplies if they exist in a certain amount. Several factors can also affect the total supply. 
    • Over time, the total Ethereum supply has been growing slowly. A cryptocurrency’s total supply circulates through the market and increases with time, a practice that raises inflation concerns. In response, it has been suggested that a fixed supply could be introduced soon.
    • In the same way as coin burnings, this can result in a reduction in the total supply of coins.

Further, a coin’s market price and its circulation numbers can be used to calculate a coin’s total market capitalization. 

The total market cap of a certain cryptocurrency, for example, would equal $2 million if it is traded at $2.00 per coin and has 1 million coins in circulation.

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