An increasing number of people are looking to cryptos as a source for passive income, but with so many options available, how can you decide where to put your money? The token’s supply is a crucial metric to consider, as it may impact the token’s value through time.
Consider Bitcoin, which will only ever have 21 million tokens in circulation, and Dogecoin, which may create an endless number of tokens and presently has over 140 billion in circulation. One reason Bitcoin’s value has risen, but Dogecoin keeps struggling considerably, is the basic contrast in token supply between the two.
These examples only scratch the surface of token supply and tokenomics, so let’s dive in and learn the fundamentals.
Why Does Token Supply Matter?
In the cryptocurrency world, the concept of “supply” means the total number of tokens that will ever be manufactured, with “maximum supply” denoting the absolute maximum and “circulating supply” representing the current number of tokens in circulation. Tokens generated but not yet distributed are added to the total supply until it reaches the maximum supply.
But why does this matter? The token supply directly affects a cryptocurrency’s value, making the laws of supply and demand relevant. In the event of high demand and limited supply, the value of a coin will rise.
Conversely, a cryptocurrency’s value may decline if there is a massive supply of tokens but relatively low demand. The maximum supply is the most critical aspect in determining the potential value of a token, which may be influenced by both the total supply and the circulating supply.
Understanding Maximum, Total, and Circulating Token Supplies
Though the names themselves make the difference pretty clear, let’s still break down the key characteristics of maximum, circulating, and total supplies.
Maximum supply of any given cryptocurrency is the fixed maximum number of tokens that may ever be generated. For Instance, the maximum supply of BTC is capped at 21 million. A hard cap in the Bitcoin protocol ensures that once the total supply of coins hits 21 million, no more will be “mined.”
In contrast, the circulating supply is the total amount of tokens that are in circulation and may be bought, sold, or otherwise transacted with. This amount will always be less than the total supply but may sometimes equal to maximum supply.
The formula for calculating the circulating supply goes as follows:
Market Cap / Price = Circulating Supply
For example, at the time of writing, the market cap of BTC is $546,464,240,154, where each token costs around $28,262, and when we put the numbers in formula, we get the circulating supply of 19,357,000 BTC coins.
The total supply is the sum of the maximum supply plus any tokens created but not yet distributed. This figure is usually higher than the number of tokens in circulation because it includes coins subject to a lockup or vesting period after a private sale or an ICO.
To keep it short, the maximum supply is the upper limit, and the circulating supply is the current number of tokens in circulation. The total supply includes the maximum supply and any additional tokens minted but remains unreleased.
Factors Influencing The Token Supply And Price
Depending on tokenomics, certain factors can decrease or increase the supply of a token, which in turn affects its value. So, what actions can alter the token supply?
Some cryptocurrencies include a feature called “burning” coins, which entails sending a certain amount of cryptocurrency coins to an address, also known as “dead wallet,” from which they can never be recovered. This reduces the circulating supply of the currency, which causes scarcity of the token and boosts its value.
Meanwhile, the inflation rate does the opposite. A coin’s inflation rate refers to the pace at which its total supply grows over time. Some digital currencies have a limited quantity that cannot be increased, while others may allow that number to rise over time.
The current inflation rate for Bitcoin, for instance, is roughly 4%, which implies that the total quantity of Bitcoin will rise by 4% annually. The currency’s value is reduced if the pace of inflation exceeds the rate at which the new currency is created.
Staking/lock up is the third popular methodology that can also have some influence on the price. To participate in network activities (such as verifying transactions or receiving rewards), some cryptocurrencies require users to “stake” or lock up their tokens for a specified time. This can momentarily reduce the number of tokens in circulation and enhance the token’s value due to reduced market liquidity.
How Can Supply Help You Determine a Token’s Future Performance?
While token supply is undoubtedly an essential metric to consider when evaluating the investment potential of a cryptocurrency, it is still not enough for making accurate price forecasts. As such, besides supply, market capitalization and trading volume are crucial factors to be considered.
For instance, when the token supply is high, but the market cap and trading volume are low, this may suggest that demand is also low. This may result from low adoption, trust, or just a lack of knowledge about the project. This is typical for startups in their formative phases, so before putting money into them, you should thoroughly study their foundations and backgrounds.
On the other hand, a high market cap and trading volume, coupled with a limited token supply, may indicate a high demand and future growth potential. Also, coins with a larger market cap tend to be less volatile, making them a safer investment.
All these factors are essential indicators of the project’s credibility, so save yourself some nerves and do the proper research before putting money into any digital asset.
