Understanding circulating supply is essential for investors and traders, as it helps gauge the market capitalization and potential value of a cryptocurrency. 

When selecting a cryptocurrency to trade, invest in, or include in your portfolio, there are several important factors to consider, including the coin or token’s price history, tokenomics, and the technology that supports it. 

In this article, we’ll explore what circulating supply means in the context of cryptocurrency, explain why it is an important factor to consider and look into how it is calculated and how crypto mining impacts it.

What is the Circulating Supply?

Circulating supply refers to the total amount of a cryptocurrency that is currently available to the public and can be traded in the market. This includes coins or tokens that are actively being used, held by investors and are not locked or reserved for specific purposes. 

Think of it as the portion of a cryptocurrency that is currently “in circulation” and available for buying and selling.

For example, if a cryptocurrency has a total supply of 1 million coins, but only 500,000 are currently available for trading, the circulating supply would be 500,000. 

This measurement is crucial because it gives a clearer picture of the cryptocurrency’s availability and helps investors assess its potential market value.

Why is Circulating Supply Important?

1. Market Capitalization

Circulating supply plays a vital role in calculating a cryptocurrency’s market capitalization (market cap), which is determined by multiplying the circulating supply by the current price of the coin. 

For example, if a coin has a circulating supply of 500,000 and is priced at $10, its market cap would be:

Market Cap = Circulating Supply x Current Price 

Market Cap= 500,000 x 10 =5,000,000

A higher market cap often indicates a more established and stable cryptocurrency, making it a critical factor for investors to consider.

2. Supply and Demand Dynamics

Circulating supply directly impacts the supply-and-demand relationship in the market. 

If a cryptocurrency has a low circulating supply with high demand, the price is likely to increase. Conversely, a high circulating supply may lead to lower prices if demand does not keep pace.

3. Inflation and Deflation

Understanding the circulating supply can also help investors gauge the potential inflation or deflation of a cryptocurrency. 

If a project continues to mint new coins without a corresponding increase in demand, it may lead to inflation and a decrease in the value of existing coins.

How is Circulating Supply Calculated?

It is relatively straightforward. It involves identifying the total supply of a cryptocurrency and subtracting the amount that is locked, reserved, or otherwise not available for trading. 

The formula looks like this:

Circulating Supply = Total Supply − (Locked Tokens + Reserved Tokens)

For example, if a cryptocurrency has a total supply of 1 million coins, with 200,000 coins locked and 100,000 reserved for future development, the circulating supply would be:

Circulating Supply = 1,000,000 − (200,000 +100,000) = 700,000

How Crypto Mining Impacts Circulating Supply

Crypto mining, particularly in Proof of Work (PoW) cryptocurrencies like Bitcoin, is significantly affected.

Mining is the process by which new coins are generated and transactions are verified on the blockchain.

As miners solve complex mathematical problems, they create new coins that are added to the circulating supply.

1. Continuous Supply

In PoW cryptocurrencies, new coins are created continuously as long as miners are active. This process means that the circulating supply will gradually increase over time. 

For instance, Bitcoin has a capped total supply of 21 million coins, but new Bitcoins are mined at a decreasing rate through a process called halving, impacting its circulating supply.

2. Mining Rewards and Incentives

Miners receive rewards for their efforts, usually in the form of newly created coins. This not only increases the circulating supply but also serves as an incentive for miners to continue supporting the network. 

As mining rewards decrease over time (like in Bitcoin’s halving events), the rate of increase in circulating supply also slows down.

3. Market Reactions

Changes in the circulating supply due to mining can lead to market reactions. If there is a sudden influx of new coins, it may cause the price to drop if demand doesn’t keep pace. 

Conversely, if the mining rewards decrease and fewer coins are introduced, it could create scarcity, driving prices up.

Conclusion

Understanding the term is crucial for anyone involved in cryptocurrency trading or investing. 

It helps in assessing market capitalization, analyzing supply and demand dynamics, and predicting potential inflation or deflation trends. 

The impact of crypto mining on it further underscores its importance in the cryptocurrency ecosystem. 

By keeping an eye on the circulating supply, investors can make more informed decisions and better understand the market dynamics of their chosen cryptocurrencies.