UNDERSTANDING A CRYPTOCURRENCY’S SUPPLY

It’s impossible to accurately value a cryptocurrency without understanding its present and future supply. The supply of a given coin is one of the most important factors in its price, as well as one of the most misunderstood. You’ve got circulating supply, max supply, lost tokens, inflation, and a bevy of other factors that can affect a coin’s market cap. Understand circulating supply, and how it relates uniquely to each coin, is an essential part of due diligence. Within our premium, members-only Coinist Insiders Network, our job is to identify early stage cryptocurrencies with a high probability for success before there is any retail hype around them. Within the Insiders Network we have a section called “coin distribution analysis” where we deeply analyze token supply and distribution based on either an ROI range or by category. This is a critical step for us before we decide to shortlist a project for further analysis. Let’s talk about why this type of analysis is so important.

CIRCULATING SUPPLY VS. TOTAL SUPPLY VS. MAX SUPPLY

Dial up CoinMarketCap and you’ll see circulating supply listed prominently for each coin. But there’s huge differences token to token, and circulating supply must be weighed with the coin’s eventual max supply. Let’s break this down a bit.

The amount of a cryptocurrency can be defined in circulating supply, total supply, and maximum supply. We’ll use Bitcoin, the most prominent cryptocurrency, as an example. There are around 16.6 million Bitcoin in circulation. Circulating supply is the amount of a currency out in the real world; being used day-to-day and trading through exchanges. Other coins have a much greater circulating supply. Hukaii for example, has 1 Billion HKI tokens floating around.

Total supply is circulating supply plus additional coins mined, but not on the market. Straight from CoinMarketCap: “Coins that are locked, reserved, or not able to be sold on the public market are coins that can’t affect the price and thus should not be allowed to affect the market capitalization as well.” If a team had mined coins and then held them, they exist, but aren’t circulating. Thus, total supply. Teams might hold coins for a wide variety of reasons.

Lastly, max supply is the maximum amount of a coin that will ever be produced. There will be 21 million Bitcoins. Period. That’s all. That sounds like a lot, but compared to some currencies we’ll discuss later, it’s small fry. The coins get more and more difficult to mine over time automatically, to slow the production rate of the currency.

THAT’S ALL FINE IN THEORY, BUT…

In theory, a coin’s circulating supply will eventually equal its max supply. All the coins that can be mined or created, will be if miners are given enough time. But in practice, there likely won’t ever be 21 million Bitcoins circulating. There are a variety of reasons coins may not hit their max supply. Sometimes, coins are simply lost or forgotten. Users lose hard drives with tokens on them. There are stories of people carelessly chucking out hard drives ,with millions of dollars worth of Bitcoin on them. We won’t ever be seeing those particular tokens again. Other times, coins simply never hit the market. Many crypto aficionados know the story of how Satoshi Nakamoto, the mysterious Bitcoin creator, allegedly holds over a million Bitcoins still. Satoshi, the pseudonym for Bitcoin’s founder, who has never been identified, mined the bitcoins and then disappeared. They’ve never been used, sold, or sent anywhere. So it’s possible those tokens will never be added to the Bitcoin’s circulating supply . A coin’s circulating supply and maximum supply may never match up.

21 million of anything seems like a decently large amount. But Bitcoin’s circulating supply pales compared to some of the other largest market caps. Ethereum’s circulating supply is 95 million. Ripple’s is 38 billion. And that’s just a fraction of the 100 billion Ripple that will be produced. Many lesser-known coins have even higher values. Dentacoin has 303 billion tokens in its circulating supply. Some have argued to make cryptocurrencies more practical in use, an individual token must be more affordable. It’s lot easier to send a friend 100 Dogecoin then to be like “Yeah, let me send you 0.0001 Bitcoin.” Calculating the fractional values required for everyday transactions can be a pain.

Bitcoin’s max supply is set. But many other coins aren’t as written in stone. We’ve already covered how the max supply of some tokens will be significantly larger than Bitcoin. But some coins can produce unlimited amounts, depending on their algorithms and the wishes of their development team. This has many worried about inflation ruining the value of their coins. This isn’t an issue for tokens that are produced in set amounts. But currencies like Ethereum could potentially be produced in infinite amounts. This is a huge disincentive to both miners and tokenholders. Nobody wants to mine or long-term hold a currency that could be devalued by inflation. On the other hand, Ethereum is in a massive bull run and the clear #2 in the crypto world. So it’s not necessarily a problem.

CONCLUSION

Circulating supply is possibly the crypto metric hardest to compare. A given circulating supply is influenced by the team, their long-term plan, whether they hold tokens, if there’s a set amount to be mined, and so on. However, it gives prospective investors a snapshot of where a coin is in its mining lifecycle. A circulating supply can be a guide to if a coin will continue to appreciate, or if inflation may ruin it. The differences from token to token are just another reminder to do your own research.