Circulating Supply definition: The number of a cryptocurrency's tokens actively available and in circulation within the market, excluding locked or reserved tokens.
The circulating supply refers to the total number of cryptocurrency tokens or coins that are publicly available and circulating in the market. It represents the portion of the total supply of a cryptocurrency that is currently being traded or held by users, excluding coins that are locked, reserved, or not yet released.
A fundamental distinction should be made between circulating supply, total supply, and max supply. While the former refers to coins available for trading, the latter encompasses the absolute number of coins that exist for a particular cryptocurrency, including those that might be locked away or unreleased. The difference between these two figures can often give insights into a cryptocurrency's distribution strategy or economic model.
Why is the circulating supply so important? Primarily, it plays a critical role in determining a cryptocurrency's market capitalization, a pivotal metric in assessing its market value. Market capitalization is computed by multiplying a cryptocurrency's current market price by its circulating supply. Thus, knowing the circulating supply helps investors gauge the relative size of a cryptocurrency in comparison to others in the market.
Moreover, the circulating supply provides clarity about a cryptocurrency's distribution. For instance, a large circulating supply can indicate that a coin is widely distributed, potentially reducing the risk of significant price manipulation by a few large holders, often referred to as "whales" in the cryptocurrency market. Conversely, a smaller circulating supply might suggest a higher token price, given the principles of supply and demand, but could also hint at centralization or potential scarcity.
A practical example to elucidate the importance of circulating supply can be drawn from Bitcoin. Bitcoin's total supply is capped at 21 million, but not all of these coins are in the circulating supply. Many Bitcoins have been lost over time due to forgotten passwords or hardware malfunctions, while others haven't yet been mined. The circulating supply of Bitcoin, therefore, offers a more accurate representation of the coins available for trading and utilization in the market at any given point.
However, it's crucial for investors to approach circulating supply with discernment. Some projects might artificially reduce their circulating supply by locking away large portions of their tokens, creating an illusion of scarcity. Others might have vesting schedules for team members, advisors, or partners, which means a portion of the total supply will enter the circulating supply over time.
In summation, circulating supply offers insights into a cryptocurrency's availability, distribution, and potential value.