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What is circulating supply, and what does circulating supply mean in crypto space? This article breaks down every aspect of the metric, its variations, and viability for existing digital assets.
Circulating supply — an essential indicator for understanding the relative valuation of assets in the cryptocurrency space. This metric represents the unique dynamic of crypto markets compared to traditional asset markets but can be more complicated to calculate accurately in some cases.
What is circulating supply in crypto?
Circulating supply represents the total number of cryptocurrency tokens that aren’t subject to restrictions, lock-ups, and available on the public ledger of the asset. But what does circulated mean?
It means that traders can easily buy and sell the tokens via exchanges, which is why the metric also excludes foundation, project, and founder coins that haven’t been sold yet and units locked by governance protocols or staking.
For investors, circulating supply is an essential metric for defining a relative value of any digital asset by calculating its market capitalization. To establish market cap volume circulating supply has to be multiplied by the price of a single token. Market cap indicator has the same meaning for both stocks and crypto markets, which is evaluating the total value of a company/project.
However, the circulating supply metric is quite different from its counterpart in traditional finance. Float represents the number of tradeable asset units, shares held by the employees and investors of the company excluded. It’s possible to calculate it in a predefined way as restrictions on lock-up of assets are enforced by law. The same doesn’t work for circulating supply yet, even though smart contracts may change it in the future.
Circulating supply vs total supply
While circulating supply refers to the assets currently available for trading, there’s also a metric of total supply, which represents the number of coins in existence. It consists of an available supply of assets and tokens locked through staking, farming, and restrictions. However, the concept of total supply excludes the coins burned previously.
Unlike circulating and total supply, which can be reduced by burning, locking, and staking, max supply quantifies all the tokens that have ever existed and will exist in the future. From the investor’s perspective, it’s convenient to know if the supply of the asset is limited. For example, Bitcoin max supply is strictly capped which means there will never be more BTC than this cap.
Bitcoin circulating supply
One of the main factors that make Bitcoin the most valuable crypto is its scarcity. Satoshi Nakamoto — the developer of BTC — created the digital asset so that there is a hard limit on how many tokens can exist. In addition to the scarcity effect, limited supply allows controlling the inflation rate.
What is the maximum amount of Bitcoins that can be in circulation? The max supply of these tokens is 21 million units. Over 90% of it’s already in the circulating supply, meaning only around 2 million coins are left unmined.
The process of adding new BTC tokens into circulation is called mining. It revolves around verifying and validating blocks of transactions on the blockchain by solving complex mathematical problems with computing power. All the miners receive compensation in BTC in return for the computing power they offer. The average rate of introducing new Bitcoins to the blockchain is 1 block every 10 minutes.
However, the number of BTC tokens in each block decreases by 50% every four years, starting from 50 BTC per block in 2008. This also results in higher requirements for processing power needed to mine a single token. Bitcoin is the lowest circulating supply cryptocurrency, and it may seem like it’s close to reaching the limit. Still, considering the schedule on reducing the rewards for mining and general tendencies, experts predict that the final 10% of the supply will sustain until 2140.
What will happen when the total supply of Bitcoin reaches its limits?
While some analysts argue that Bitcoin will never reach its limit of 21 million due to the bit-shift operator system the blockchain uses, others emphasize that nearly 3.7 million coins of those in circulating supply are actually not available for trading due to reasons like loss of access or private addresses. Ultimately, the Bitcoin network will remain functional as a closed economy even after 2140: no additional BTC will be issued, but the blocks of transactions will be confirmed.
However, the total value of Bitcoin in circulation continues to increase steadily, so here are some of the most important effects industry has to expect from it reaching the limit.
Effect on BTC miners
Block rewards are the main source of revenue for miners of Bitcoin as the high price of the token makes it possible to cover operational costs and obtain profits by selling it on the exchanges. This will no longer be the case when Bitcoin reaches its maximum supply, as rewards will get too small to either cover the miners’ costs or generate any profits.
This is why transaction fees are expected to come upfront as the new main source of revenue. If the BTC network is used as a medium of exchange, miners will receive reasonable fees for enabling BTC use in daily transactions. In case the network becomes the store of value, miners will conduct fewer transactions that will be considerably more expensive.
Another potential outcome is that miners will form a cartel to control supply and set higher transaction fees to secure profits. They can also focus on selfish mining, which delays the production of the last block in the BTC network and guarantees high rewards for the new blocks that are released into the network. Such groups already exist in traditional commodities; for example, OPEC production output has a large influence on oil prices.
Effect on BTC network
Distributed ledger technology is what makes the Bitcoin network so convenient. If the amount of Bitcoin in circulation reaches its limit and BTC becomes commonly used as a medium of exchange, transactions will drastically increase.
This can lead to slowdowns in the network's performance due to its architecture that relies on a distributed database, which sacrifices speed for quality and integrity. This is where Layer 2 technologies become responsible for conducting a major share of network transactions.
An alternative scenario revolves around Bitcoin becoming a reserve asset, which will result in a decreasing number of transactions. BTC trades will be small, and large institutional players and trading companies will dominate the market. There will be significantly fewer trades with much higher transaction fees from miners.
Effect on BTC cryptocurrency
Bitcoin was created as a medium of exchange for daily transactions. However, the high transaction fees and relatively slow processing times combined with volatile price swings due to large speculative investors usually keep serious investors from the asset.
When the number of BTC in circulation reaches its limits, the price will become more stable, and transaction speed will increase due to the development of Layer 2 channels like the Lightning network. It’s also possible that the Bitcoin network adopts a common regulatory system, which will draw the attention of institutional investors to the cryptocurrency domain.
Calculating circulating supply cryptocurrency metric
Bitcoin and Ethereum are working examples of circulating supply metrics. There’s a noticeable difference between the circulating supply schedules of these cryptocurrencies. Messari’s demarcation suggests five inputs of the metric:
- Token Generation. Maximum supply and Initial Generated supply.
- Programmatic Inflation. Inflation policy and forecast, a method for amending policy.
- Programmatic Inflation. Burn policy and loss estimates.
- Founder’s Supply. Liquidity, vesting, and secondary sale policy.
- Community Supply. Liquidity, vesting, and secondary sale policy.
The relevant input for Bitcoin is Programmatic Inflation. All the BTC tokens that have been produced and will ever be in circulation were created through a block reward on a specific inflation schedule. Token Generation input is also relevant to Bitcoin as inflation parameters such as the max supply of 21 million units were decided with production of a Genesis block.
Unlike Bitcoin or some altcoins with limited supply, Ethereum doesn’t have an explicit cap on supply. The supply of ETH in circulation spiked up to 60 million right from the beginning due to distribution among early supporters that invested in the project during the ICO phase. Right afterwards, the creation of the Ethereum development fund brought another 12 million of ETH to the circulation.
The fact that 72 million of Ether tokens were added to circulation at the Genesis block makes it relevant to use token generation input. However, ETH also provides block rewards, which means that its circulating supply also can be characterized by the programmatic inflation input.
Circulating supply is the metric that represents the unique dynamics of the cryptocurrency markets and refers to the number of coins available for trading at the given period. Bitcoin is an example of a fixed supply cryptocurrency that limits the max supply of tokens, while Ethereum doesn’t have an explicit limit on supply. Circulating supply is also essential for calculating the market capitalization of an asset and estimating its relevant value.