You must have heard of Circulating Supply and Maximum Supply if you have spent any significant amount of time dabbling in the cryptocurrency industry. Simply put, the total number of cryptocurrency tokens that are freely tradable at any particular time is known as the circulating supply.
Understanding Circulating Supply
A cryptocurrency’s circulating supply can increase or diminish over time. For example, until the maximum number of 21 million coins is reached, the circulating supply of Bitcoin (BTC) will progressively increase. This slow rise is linked to the mining process, which produces new coins every 10 minutes on average.
Furthermore, a cryptocurrency’s circulating supply may be used to determine its market capitalization, which is calculated by multiplying the current market cost by the number of coins in circulation:
Market Cap = Price X Circulating Supply.
The supply can also be diminished, either intentionally by “burning” or by mistake, such as transferring coins to an unrecoverable address or losing access to a wallet containing coins.
The measure of circulating supply is a poor estimate since the network as a whole has no accurate information about how much of the overall supply is in active circulation.
(The number of BTC in circulation worldwide, from 2009 through 2022. Source: Statista)
Another key aspect of Bitcoin’s circulating supply is programmed inflammation. All bitcoins that have been created and will be created were made as a result of a block reward based on a predetermined inflation schedule.
Maximum Supply
A cryptocurrency’s maximum supply refers to the maximum number of coins that will ever be produced. This implies that once the total supply is reached, no new coins will be generated.
According to the cryptocurrency source code, the maximum supply and production of new coins are calculated in the first block of the cryptocurrency, also known as the genesis block.
Taking this into example, Bitcoin’s maximum supply is capped at 21 million coins, which means that when Bitcoin reaches 21 million coins in a circulating supply, no further coins will be generated. Some cryptocurrencies do not have a maximum supply coded into their source code; a good example of this is Ethereum (ETH). Although Ether does have an annual maximum supply cap, it does not have a total maximum supply implemented into its source code. This means that Ethereum’s supply will only keep increasing as time goes by.
Coin Burning Events
The process of irreversibly removing coins from circulation and lowering their overall supply is known as coin burning. This is usually accomplished by moving the coins to a wallet from which they can’t be withdrawn. Burning coins is similar to a corporation buying back its stock. In this way, the corporation “returns worth” to its stockholders. To achieve the same purpose, crypto projects “burn” their coins.
(Binance CEO, Changpeng Zhao. Source: CoinDesk)
Taking into account, for example, Binance launched its first-ever auto-burn program for its cryptocurrency, eliminating roughly 1.6 million Binance (BNB) tokens valued at $750 million from circulation. Binance has planned to burn 100 million BNB tokens, or 50% of the circulating quantity.
Takeaways
- The total number of cryptocurrency tokens that are freely tradable at any particular time is known as the circulating supply.
- A cryptocurrency’s circulating supply can increase or diminish over time.
- The supply can also diminish, either by burning coins or by mistake, such as losing access to a wallet containing coins.
- Maximum supply refers to the total number of cryptocurrency coins that will ever be produced.
- The process of removing coins from circulation and lowering their overall supply is known as coin burning.
