Supply is a key element of a cryptocurrency’s tokenomics. It allows an investor to know the number of tokens in circulation and estimate a crypto’s rarity. Supply encompasses three concepts: circulating supply, total supply, and maximum supply.
Circulating supply
The circulating supply represents the tokens currently circulating at a given time. This number changes depending on the number of tokens created or destroyed.
The circulating supply can increase in two ways. Cryptos can be mined, and new coins are then created and presented on the market, for example, in proof-of-work ecosystems like Bitcoin.
Tokens can also be created instantly. This is the case for many fan tokens, like that of Paris Saint Germain (PSG). A large part of the supply was created immediately at the club’s request. The first ETH was also minted instantly. However, this is no longer the case today, and ETH is created with each new block.
Total supply or total offer
The total supply represents the total supply of tokens minus the tokens destroyed or burned. This, therefore, takes into account the tokens mined but not yet distributed to the ecosystem’s actors.
This category also includes tokens locked for investors. When they invest during fundraising, they generally agree not to sell their tokens right away and to lock them. The lock-up can last from 6 months to several years, which is a vesting period, so it does not have too much influence on the token price.
This category also includes tokens placed in stake.
Maximum supply or maximum offer
The maximum supply is the maximum number of tokens that can be created. Developers often set this number before creating the first block (called the Genesis block). Once the maximum supply is reached, miners can only rely on gas fees as a mining reward.
A famous example of maximum supply is Bitcoin. A maximum of 21 million BTC will be created by 2140, knowing that 19.5 million BTC are already in circulation on the market. Not all cryptocurrencies have a maximum supply; this is the case for Ethereum’s Ether, Polkadot’s DOT, or Cardano’s ADA.
Supply should not be confused with market cap (or capitalization), which is the product of the supply in circulation multiplied by the price of the tokens.
Typical examples of cryptocurrency supply
Bitcoin: a limited total supply
The maximum supply of Bitcoin is 21 million units. Therefore, the supply of BTC is capped and experiences an inflation of 1.8% per year on average. Miners create the new BTC, but as the mining rewards are divided by two every four years via halving, the number of BTC issued will approach the 21 million units planned by Satoshi Nakamoto more slowly.
The advantage of a capped supply like Bitcoin’s is that it allows a cryptocurrency to become scarcer over time. If demand grows faster than supply, the asset is likely to retain its value.
Ethereum: an unlimited total supply
The maximum supply of the ETH cryptocurrency on the Ethereum blockchain is not limited.
The first ETH was pre-mined (when Ethereum was in Proof of Work) and distributed to Ethereum development teams and ICO investors. So, a large part of the circulating supply of ETH was issued at launch.
Today, Ethereum also implements a burn mechanism. This means that when network activity is high, the supply of ETH decreases because the number of ETH burned is greater than the number of ETH created.
Conclusion on the supply of cryptocurrencies
There are different types of supply: circulating supply, total supply, and maximum supply. Understanding them allows you to estimate a cryptocurrency’s rarity and potential over time.
The supply of a cryptocurrency is constantly changing, impacting the evolution of prices and the use of the asset. This metric is an essential component of a cryptocurrency’s tokenomics, and it is essential to understand how its different variants work before investing.
