Investing in cryptocurrencies is not an easy undertaking. It requires diligence, patience and above all, basic knowledge of fundamental analysis and markets. Any self-respecting trader should pay attention to the circulation and total supply of the coin they want to invest in. In the cryptocurrency world, this is called tokenomics. It is directly related to market capital.
The more digital assets are put into circulation, the more their value will fall. And of course, the reverse is true: the more coins are burned or taken off the market, the higher their value will be.
In today’s lesson, we will discuss the supply that influences the prices of cryptocurrencies, and we will mention what to do during the fundamental analysis of a particular project. After today’s article, you will already know very well what to look for in your cryptocurrency investments!
Circulating Supply – what is it?
Circulating Supply is the current number of coins in circulation on the blockchain. For Bitcoin, the circulating supply will be 19 million and for Ethereum, 121 million.
Circulating Supply is always a percentage of the total supply. The higher the percentage, the better. Bitcoin’s circulating supply of 19 million is about 90% of the maximum supply, which is 21 million. What does this mean? That the value of bitcoin cannot be significantly reduced by the influx of new coins on the market.
Let us look at another example. If the total supply of a particular cryptocurrency is 100 million and its supply is 5 million, then the circulating supply is 5%. Then it is very risky for the project because the influx of new coins can effectively “dilute” the market.
That sounds a bit scary. However, you have nothing to fear. The amount in circulation can easily be calculated with a simple mathematical formula…:
Market Cap / Cryptocurrency Price = Circulating Supply
How does Circulating Supply affect the price of cryptocurrencies?
Many inexperienced traders who are not enrolled at our university often assume that it is worth investing in a particular cryptocurrency if the price is high. This is not so wrong – although there are of course exceptions to this rule. For an experienced trader, a high price of a certain cryptocurrency more or less means that the circulating supply is low.
However, let’s look at the example of Ethereum. The circulating supply of Ethereum is higher than that of Bitcoin. This impacts its price, which is usually lower than that of our flagship cryptocurrency.
Now let’s look at this example from the other side. When the price of a particular cryptocurrency is low, many people assume that the project associated with it is not worth anything. In reality, however, the supply is not high either. A good example of this is the well-known Memecoin – Shiba Inu. Its Circulating Supply is 550 million, and its price is only $0.00001230 at the time of writing. Despite this, it manages to keep its market capitalization at a relatively high level of around $6 billion.
Does burning cryptocurrencies affect the Circulating Supply?
Burning a certain amount of cryptocurrency can impact the price by reducing the number of coins in circulation. We have written here about how cryptocurrency burning works and what it entails.
Burning cryptocurrencies is nothing more than taking them out of circulation by sending them to the wallet address that performs this activity. Again, we will use Shiba Inu – thanks to this process, the project has effectively reduced its supply, which has contributed to its success.
Investment Decisions vs Circulating Supply
Before investing in a cryptocurrency or crypto project, you should check the ratio between the circulating supply and the total supply. If more than 80% of the coins are in circulation, things are going downhill. Seriously consider another investment.
The same applies if less than 50% of the coins are in circulation. Then there is a risk that suddenly more of that cryptocurrency will flood into the market, and it will lose value.
Also remember that the market capitalization does not always increase when the circulating supply increases. When you invest, remember one important thing: make sure that the project you have invested in does not have less than 50% of the circulating supply. The price can rise in a short time, while a rapid influx of coins into the market can reduce your potential profits.
Total Supply – definition
You have already guessed that the total supply is the total supply of coins in circulation. Simply put, it is the total coins minted or issued minus the coins burnt/destroyed. In addition, coins that can be traded are also included in the total supply.
The total supply includes both coins in circulation and coins that have yet to enter the market. Note that the total supply cannot be used to determine the market capitalization of a particular cryptocurrency.
Circulating Supply vs. Total Supply
Circulating supply is clearly different from total supply. Circulating supply is all the coins that are active on the blockchain. Let’s look at Satoshi Nakamoto. He owns 1 million BTC. Even though the coins have not been moved for more than 10 years, they are still considered part of the circulating supply.
A good example of the total supply is Terra (LUNA). Its sudden growth led to its collapse. To launch the new stablecoin UST, the Terra team had to start minting new tokens – LUNA. All to support UST. The total supply of LUNA suddenly went from 300 million to 6.5 trillion in just a few days. The effect? A drop in the price of LUNA from about $80 to about $0.0001. And all because the project was devalued by the increase in supply.
Again, we have an interesting fact for you. The inflation risk is relatively high for DeFi coins based on smart contracts.
Summary
So, you can see that circulating supply and total supply are two key components that influence the price of a given cryptocurrency. Thanks to them, you as an investor can analyse the project and predict the rise or fall of the price of a particular coin.
Knowing how to invest based on the circulating supply is a great lesson, especially for inexperienced traders.
