Circulating Supply in cryptocurrency refers to the total quantity of coins or tokens that are currently in active circulation and available for trading within the market and among the general public.^[1][2][3]

Overview

The circulating supply of a cryptocurrency is similar to the outstanding shares of a publicly traded company. It represents the number of coins that are currently available for trading, as opposed to the total maximum coin supply. This number can fluctuate depending on the number of new coins or tokens being minted or mined and the number that gets destroyed through burning. When a company issues a specific quantity of tokens, they typically release only a fraction of the total supply into circulation. The Circulating Supply is consistently smaller in comparison to the total supply of a token.^[3][4][11]

The circulating supply of a cryptocurrency plays a crucial role in calculating its market capitalization. It also affects the supply-demand dynamics, which in turn influences the price of the coin. Different cryptocurrencies have varying approaches to determining their circulating supply, making it essential to grasp these concepts to better understand the cryptocurrency market.^[4]

The circulating supply is important because it provides insights into the size and worth of a cryptocurrency in the market. A high circulating supply can indicate that a cryptocurrency is widely available and has a large user base. This can increase the liquidity of the cryptocurrency and make it easier to buy and sell. On the other hand, a low circulating supply can indicate that a cryptocurrency is scarce and has a limited user base. Although it does not always directly correlate with an asset’s price, lower circulating supply can make it more difficult to buy and sell the cryptocurrency.^[13][14]

Circulating supply should not be confused with total supply, which is the number of coins that have been mined so far minus all the coins that have been knowingly burned, and the maximum supply, which is the hard-coded limit that neither total nor circulating supply can ever exceed. For example, even though nominally the circulating supply of Bitcoin (BTC) should be over 18 million coins — as that is how many Bitcoins have been mined since the network’s inception — it is estimated that around 4 million BTC have been permanently lost, placing the true circulating supply closer to 14 million.^[12]

How to Calculate Circulating Supply

The calculation involves taking the initial supply of coins or tokens created at the blockchain's launch and then subtracting various elements such as any coins that have been intentionally destroyed (burned), any portion of the supply that is temporarily locked for a specified duration, and any reserves earmarked for development, future release, or other specific purposes. This calculation aims to provide users and investors with a more accurate understanding of the actual number of coins or tokens available for trading in the market. ^[6]

Another way to determine the circulating supply is by dividing a cryptocurrency's market capitalization by its price. ^[6][7][8]
The circulating supply formula for this method is as follows:

• Circulating Supply = Market Cap/Price

Determinants of Cryptocurrency Circulating Supply

The circulating supply of a cryptocurrency is not fixed. Cryptocurrencies with a maximum supply that do not engage in token burning will eventually reach a fixed circulating supply. For instance, this will occur with Bitcoin once all of its coins are mined. However, the situation differs for cryptocurrencies like Ethereum, which have no maximum supply. In such cases, the circulating supply will continue to change indefinitely as new coins are created through the mining process or other means. This fundamental difference in supply dynamics can have implications for their value and scarcity. Factors that can affect a cryptocurrency's circulating supply include halving, token burns, and mining.^[5]

Impact of Token Burns

Token burning refers to the deliberate removal of cryptocurrency coins or tokens from circulation.^[5][9]

When coins are burnt, block explorers like Etherscan detect a decrease in the total supply of the cryptocurrency, which can often lead to an increase in its price. This mechanism has been used by projects like Shiba Inu to significantly reduce their supply and, as a result, potentially boost the success and value of their project.^[5][9]

Impact of Halving

Halving, as the term implies, is a process that involves reducing something by half. In the context of cryptocurrencies, it refers to the halving of crypto block rewards. This concept was introduced by Satoshi Nakamoto, the creator of Bitcoin. Nakamoto established the rule that Bitcoin's block rewards would be cut in half after every 210,000 blocks mined.^[5]

When Bitcoin was initially launched, miners were rewarded with 50 BTC per block. However, as time passed and 210,000 blocks were mined, this reward was halved to 25 BTC. Subsequently, after another 210,000 blocks, it was halved again to 12.5 BTC per block, and then to 6.25 BTC per block. This halving process will continue into the future, resulting in even smaller block rewards for miners. The idea is that as this occurs, the price of Bitcoin will continue to rise, ensuring that even these reduced rewards remain substantial for miners. Price changes caused by the halving process consequently affect the coin's circulating supply.^[5]

Impact of Mining

Mining or minting new coins is another way of increasing the circulating supply of a cryptocurrency. Mining occurs during the processing of transactions and the creation of blocks. Miners, who contribute their time, electricity, and computing power to the network, package transactions into groups known as blocks. Miners receive cryptocurrencies as rewards. The specifics of this process can vary depending on the consensus mechanism employed by a cryptocurrency.^[5]

To illustrate this concept further, consider Bitcoin once again. Miners process BTC transactions, package them into blocks, and receive new BTC as a reward. These newly earned coins were originally part of the maximum supply but not part of the circulating supply. However, through the mining process, they are introduced into the circulating supply. ^[5]

Circulating Supply Vs. Total Supply Vs. Maximum Supply

The circulating supply refers to the coins that are available to the public and should not be confused with the total supply or max supply. The total supply is used to quantify the number of coins in existence, which is the number of coins that were already issued minus the coins that were burned. This includes coins or tokens that are not necessarily available for transactions, such as those locked up or reserved. On the other hand, the max supply quantifies the maximum number of coins that will ever exist, including the coins that will be mined or made available in the future.^[1][10]