What Is Circulating Supply?
Circulating supply refers to the number of cryptocurrency coins or tokens that are currently available in the market and accessible for trading or use. This value is dynamic and can increase or decrease over time due to various factors, such as mining, minting, burning, or accidental loss of tokens.
Key Factors Influencing Circulating Supply
- Mining and Minting:
- For mineable cryptocurrencies like Bitcoin, the circulating supply increases gradually as new coins are mined and added to the network.
- For centralized tokens, developers can increase supply by minting new tokens, often subject to pre-defined rules or governance processes.
- Burning:
- Coins can be intentionally removed from circulation through burning, a process where tokens are sent to an unrecoverable address. This reduces the circulating supply and is often used to create scarcity and drive demand.
- Lost or Inaccessible Tokens:
- Tokens can be permanently removed from circulation if they are sent to unrecoverable addresses or if wallet access is lost.
Difference Between Circulating Supply, Total Supply, and Maximum Supply
- Circulating Supply: The amount of cryptocurrency currently available for trading and use in the market.
- Total Supply: The total number of coins that exist, including those not yet in circulation (e.g., reserved tokens or locked tokens).
- Maximum Supply: The hard-coded limit on how many coins can ever exist, such as Bitcoin’s cap of 21 million coins.
Example: Bitcoin’s Circulating Supply
- As of now, Bitcoin’s nominal circulating supply is over 18 million BTC since that is how many coins have been mined.
- However, due to losses (e.g., forgotten private keys or coins sent to irrecoverable addresses), approximately 4 million BTC are estimated to be permanently inaccessible.
- This places the effective circulating supply closer to 14 million BTC.
Why Circulating Supply Matters
Circulating supply is a critical metric for:
- Market Capitalization: The value of a cryptocurrency is often calculated by multiplying its price by the circulating supply.
- Scarcity and Value: A lower circulating supply can create scarcity, potentially increasing the token’s value if demand remains strong.
- Investor Analysis: Investors use circulating supply to evaluate token distribution, potential inflation, and overall market dynamics.
Limitations of Circulating Supply
- Approximation:
- The metric is not entirely precise because the network cannot reliably distinguish between actively circulating coins and those that are permanently lost.
- Manipulation:
- In some cases, projects can artificially inflate or reduce the apparent circulating supply to influence market perception.
Conclusion
Circulating supply is a fundamental metric in the cryptocurrency market, helping to provide insights into a token’s availability, scarcity, and market valuation. While it is not perfect due to the inherent uncertainties of blockchain networks, it remains an essential tool for traders, investors, and analysts to assess the health and potential of a cryptocurrency.