Before embarking on cryptocurrency market investment, your initial perspective may lean towards Market Cap and trading volume in the cryptocurrency market. These indicators are typically recognized as key metrics of dominance and popularity for a cryptocurrency in the market. However, concepts such as circulating supply vs total supply vs max supply are also introduced in this regard, likely requiring detailed and comprehensive explanations. Understanding these metrics can assist you in selecting an appropriate investment strategy and leveraging this information in your decision-making.
πIn this article, we aim to explain the meaning and applications of each of these concepts. Additionally, Crypto Hovelπ will delve into the differences between circulating supply vs total supply vs max supply.
Market Capitalization(Market Cap)
Market Capitalization or “Market Cap” in the world of cryptocurrencies is one of the major and crucial concepts that reflects the overall value of a cryptocurrency or a cryptocurrency project in the market.
To calculate market capitalization, the current price of one unit of cryptocurrency (for example, one Bitcoin or one Ethereum) is usually considered in the market. Then, this value is multiplied by the total number of units available in the market, or in other words, the total number of cryptocurrency tokens in circulation.
For example, suppose the current price of one Bitcoin in the market is $50,000, and the total number of Bitcoins available worldwide is 21 million. In this case, the calculation of Bitcoin’s market capitalization is as follows:
- Bitcoin Market Cap = Price of one Bitcoin Γ Total number of Bitcoins
- Bitcoin Market Cap = $50,000 Γ 21,000,000 Bitcoins
- Bitcoin Market Cap = $1,050,000,000,000
Therefore, the total market capitalization of Bitcoin in this example is $1.05 trillion. This market cap represents the overall value of this cryptocurrency in the cryptocurrency market, providing valuable information for investors about the proportion of Bitcoin in the cryptocurrency market and the value of their investment asset.
Circulating Supply
The term Circulating Supply in the context of a cryptocurrency refers to the number of tokens that are available and tradable in the market at any given moment. This metric plays a crucial role in calculating the market value and the overall economic size of a cryptocurrency. As mentioned, the market capitalization of a cryptocurrency is derived from multiplying the price of each token by the total number of tokens in existence on the blockchain, including those that may be lost or seized.
The Circulating Supply of a digital currency can increase over time through processes such as mining and the release of additional tokens and coins into the network, contributing to the growth of capital in circulation. On the other hand, the number of tokens in circulation may decrease through a process known as Burning. In this process, tokens are eliminated by sending them to a wallet with an address that nobody possesses.
For instance, Satoshi Nakamoto (the creator of Bitcoin) mined millions of bitcoins in the early years but has never moved them to another address. All these bitcoins are considered in calculating the total Circulating Supply.
Some digital currencies, like Bitcoin, have a limited supply, and the number of coins in circulation increases only through mining. In other words, developers of certain decentralized tokens can expand the Circulating Supply through instant minting, resembling the functionality of central banks to some extent.
Total Supply
Total Supply refers to the total number of tokens created for a cryptocurrency project. This number includes tokens that are:
- Currently in public circulation and available for trading.
- Tokens that have been minted but have not yet been distributed to the market.
- Tokens that have been lost or burned.
Total Supply is a primary determinant of a cryptocurrency project’s value in the market. If the Total Supply of a specific cryptocurrency exceeds the predetermined limit, it may lead to a decrease in the value of each unit of that cryptocurrency. Conversely, a Supply below the designated limit might increase the value of the cryptocurrency. Therefore, managing the Total Supply has become a crucial issue in designing a cryptocurrency project.
For example, Bitcoin commenced its operation with a predetermined total supply of 21 million tokens. This number of tokens never increases, and it remains unchanged as long as there is no consensus for a protocol change. This example illustrates the significant role that determining the total supply plays in assessing the value of a cryptocurrency project in the market.
Additionally, some projects may hold their tokens for future use. For instance, if a project intends to reward individuals who hold their tokens for a certain period (such as staking), these tokens are locked in the blockchain until the specified conditions are met, even if they are not currently in circulation. These tokens are also considered part of the Total Supply.
maximum Supply
Max Supply in the realm of cryptocurrencies refers to the total number of tokens that are intended to be mined or, more precisely, the maximum inventory that a cryptocurrency project can potentially have. This maximum number of tokens is defined by the protocol or the code of the cryptocurrency and cannot be changed in the future. This value is typically determined at the creation of the genesis block, which is the first block recorded in the blockchain.
For example, in the case of Bitcoin, the Max Supply is 21 million units. This means that the total number of bitcoins that can possibly be mined is limited to 21 million units, and no more bitcoins can be mined beyond this amount. This decision is established through the Bitcoin protocol and code and cannot be altered.
In some digital currency protocols like Ethereum (ETH), there is no specific definition for Max Supply. However, the creation of new tokens is limited due to the constrained minting speed. This implies that new tokens are created over time but in proportion to the existing market supply.
Maintaining the maximum supply in a cryptocurrency project is of paramount importance. This contributes to the stability of the project by preventing sudden increases and keeping the maximum supply of tokens constant, thereby mitigating price volatility. On the other hand, projects that operate as stablecoins, with a fixed price, such as the most well-known one, Tether, utilize this feature to maintain stability in their prices.
Differences Between Circulating Supply vs Total Supply vs Max Supply
Differences between circulating supply vs total supply vs max supply in the world of cryptocurrencies refers to various concepts, each playing a crucial role in determining the value and features of a cryptocurrency.
| Total Supply | The total amount of tokens or cryptocurrency ever created and available. This value remains constant. |
| Max Supply | The maximum number of tokens or cryptocurrency that can ever be produced. Often serves as an upper limit. |
| Circulating Supply | The current amount of tokens or cryptocurrency available in the market and eligible for trading. It reflects the tokens accessible to investors. |
Both circulating supply and total supply have a direct impact on the token prices, but this impact is less pronounced compared to the maximum supply. When a digital currency reaches its maximum supply, the possibility of creating new tokens no longer exists. In such circumstances, two significant events occur:
- Token Scarcity: With a decrease in tradable tokens, tokens become scarcer. If the demand for these tokens increases, and their availability in the market is limited, the price of tokens rises. This increase in token prices results from their scarcity in the market.
- Miners’ Rewards: Miners can only earn rewards by receiving transaction fees. In other words, when the available tokens for trading decrease, miners strive to maximize their transaction fees. This can lead to an increase in transaction fees and, consequently, increased miner income.
In this way, maximum supply plays a vital role in controlling inflation and token value. For instance, Bitcoin’s supply is halved through an event known as “halving” approximately every four years. According to this formula, Bitcoin’s maximum supply will reach 21 million units by the year 2140. Although Bitcoin’s issuance increases over time through mining and theoretically turns it into an inflationary token, the periodic halving of block rewards prevents inflation.
conclusion
The cryptocurrency market encompasses concepts such as circulating supply, total supply, and maximum supply, each holding significant importance in their understanding and differentiation. Digital currencies are often released in limited quantities, with a few exceptions like Ethereum, which will have an unlimited supply. Circulating supply, refers to the number of mined coins available in the market and actively traded. Some coins in this category may not circulate in the market for various reasons. Total supply encompasses this exception and includes the number of coins both in the market and those that are locked or not actively circulating. Maximum supply signifies the maximum quantity a coin can be issued, and exceeding this limit is not possible.
Which one of the supplies do you think holds greater importance in the cryptocurrency market? Share your opinions and experiences with us below π£οΈπ, and if this information proves useful, share it with your friends. π
FAQ
What is the difference between total supply and maximum supply?
Total supply refers to the total number of tokens in circulation, including minted tokens that have not yet been distributed in the market. Maximum supply represents the total tokens planned for a project that will be mined in the future.
How is investment categorized based on market capitalization?
Market capitalization is a metric used to gauge the popularity of projects. Investments are made in projects with high, medium, or low market capitalization. The lower the market capitalization, the higher the investment risk.
What impact do maximum supply and unlimited supply have on prices?
Limited reserves in the case of a coin (such as Bitcoin) lead to an increase in its value over time, making it rarer. On the other hand, unlimited supply gradually decreases the value of the desired coin over time.