Learn: Crypto token supplies explained
Circulating, maximum and total supply
The crypto token supply establishes how many cryptocurrency coins will exist at any particular time and could be the circulating, maximum or total supply.
The total supply of a cryptocurrency refers to the sum of the circulating supply and the coins that are locked up in escrow, a smart contract where a third party temporarily keeps an asset until a particular and agreed condition is met. The maximum supply is the upper limit on the number of tokens that can be created, while the circulating supply is the number of tokens that exist and are available for trade in the market.
All the cryptocurrency supply metrics are crucial for determining token distribution, demand and market capitalization. They can impact the price of a cryptocurrency and are essential criteria for investors who want to assess a project’s worth.
Unlike fiat currencies, which central banks can print at will, most cryptocurrency tokens have a predetermined supply that cannot be increased or decreased freely. A token’s supply can be released at once, but most cryptocurrencies are mined such as proof-of-work (PoW) coins or minted in the case of proof-of-stake (PoS) coins over time.
Some cryptocurrencies have a limited supply, like Bitcoin (BTC), which will only ever have a finite supply of 21 million coins. Other cryptocurrencies have a maximum supply but not a finite supply. Ether’s (ETH) supply, for example, is not hard-capped like Bitcoin, but the issuance of new coins was fixed at 1,600 ETH per day after the Merge occurred.
A cryptocurrency circulating supply refers to the number of tokens in circulation in the market at any given time that are available for trade.
The circulation supply metric is used to define the market capitalization of a given cryptocurrency and accounts for the size of its economy. A cryptocurrency’s market cap is obtained by multiplying the price per unit by the number of all the existing coins in a blockchain, even the ones that have been lost or confiscated.
Somewhat emblematic is the example of Bitcoin and its creator, Satoshi Nakamoto, who mined millions of BTC in the early years but never moved them. Whatever the reason behind such a decision, all those Bitcoin are still included in the total circulating supply of the cryptocurrency.
There is a sub-metric of market cap, denominated realized market cap, which calculates the price of a coin when it was last moved as opposed to the current value. Realized market cap does not include coins that have been lost or are dormant in a blockchain, reducing their impact on the price.
Some cryptocurrencies, like Bitcoin, have a finite supply, and their circulation is only increased through mining. On the other hand, developers of some more centralized tokens can increase their circulation supply through instantaneous minting, a bit like central banks.
Circulation supply can also decrease by a process called burning, which means destroying the coins by sending them to a wallet whose keys are not available to anyone. For this reason, the circulation supply metric should be considered somehow approximate.
A cryptocurrency’s maximum supply is the total number of tokens that will ever be mined, and it is usually defined when the genesis block is created.
Bitcoin’s maximum supply is capped at 21 million, and although anything is possible, its strict protocol and code are built so that no more BTC can ever be mined. Other cryptocurrencies do not have a maximum supply but may have a cap on the number of new coins that can be minted with a specific cadence, like in the case of Ether.
Stablecoins, on the other hand, tend to keep the maximum supply constant at all times to avoid a supply shock that could affect and fluctuate the price too much. Their stability is guaranteed by collateral reserve assets or algorithms created to control supply through the burning process.
Algorithmically-backed coins are designed to maintain a stable price, but they have drawbacks as they are vulnerable to de-pegging risks. Also, non-algorithmic stablecoins like Tether may risk de-pegging, as happened in June 2022, showing that even coins that should provide more certainty may be at risk.
The other two metrics — circulating and total supply — also affect a token’s price, but to a lesser extent than the maximum supply. When a cryptocurrency hits maximum supply, no more new coins can ever be created. When that happens, two main results are produced:
- The cryptocurrency becomes more scarce and as a result, its price may increase if demand exceeds supply;
- Miners have to rely on fees to get rewards for their contributions.
In the case of Bitcoin, the total supply gets cut in half through a process called the halving, so it is calculated that it will reach its maximum supply of 21 million coins in the year 2140. Although Bitcoin’s issuance increases over time through mining and is therefore inflationary, block rewards are cut in half every four years, making it a deflationary cryptocurrency.
A token’s total supply is calculated by adding the circulating supply to the number of coins that have been mined but not yet distributed in the market.
In the case of coins reserved for staking rewards, for instance, they have already been minted. Still, they are locked up in the project’s protocol and are only distributed when the staker meets a particular condition.
Another instance occurs when a new cryptocurrency project is launched, and the number of tokens issued is not equal to the one being distributed. These types of measures are usually taken to follow demand and not oversupply a cryptocurrency that could, as a result, affect the price negatively.
It could also be the case of tokens created by developers at a blockchain’s launch as premine to use as development funds but have not been circulated yet. Moreover, burned coins or tokens are not calculated in the total supply, as they are tokens sent and permanently locked up in a burned address that nobody will ever be able to access and are therefore eliminated forever.
It is possible to increase the total token supply, depending on the crypto protocol’s rules. With Bitcoin, for instance, unless there is maximum consensus to change the protocol, its total supply of 21 million coins can’t ever be changed. With other tokens, developers could potentially change a protocol’s supply rule by planning in advance a variable in the smart contract.
Circulating and maximum supply are equally important in their own use, and understanding their implication vs. the total supply can help assess their impact on the cryptocurrency’s price.
How a price may change in the future is a crucial assessment for an investor who could plan a different strategy depending on how each metric performs against the total supply. Total and circulating supply can change over time, so it’s essential to keep up to date with the latest developments of a project.
A summary of differences between total supply, maximum and circulating supply can be found in the below table:
Cryptocurrency coins or tokens can be easily compared to publicly traded shares in the stock market, as their price reflects supply and demand conditions. The more coins are in existence, the more demand there needs to be for a price to increase.
A low supply means that the token (a share) is scarce and if in high demand, its price will likely rise. On the other hand, if the demand for a cryptocurrency is low but has a large supply, its price may drop.