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Crypto: Understanding Key Supply Metrics


As a preamble, I would like to point out that all of the data displayed below can be found with all of the cryptocurrency data providers. Here we will take the best known: CoinMarketCap.

Circulating Supply

This is to identify how many units (tokens) of a certain cryptocurrency are currently in circulation. If we take Bitcoin as an example, currently more than 19,000,000 bitcoins (tokens) are in circulation (19,042,425) out of a total supply of 21,000,000, or 91% of the total supply.

Circulating Supply Bitcoin

This indicator allows us to understand what the current token supply is and the potential future scarcity of a cryptocurrency. For example, I wouldn’t feel comfortable if the circulating supply was only 15%, that would mean the supply is going to increase by 85% in the future which would have inevitably for repercussion to put pressure on the price. Bitcoin’s cryptographic code predicts that there will only be 21 million units, and no one will be able to create more bitcoins. Thus the supply of bitcoins is capped, which partly characterizes its scarcity. This is obviously not the case for a large number of cryptocurrencies.

For example if we take dogecoin:

Circulating Supply Dogecoin

There are 132 billion dogecoins in circulation. You can easily make comparisons with other crypto-assets.

Max Supply (The maximum tokens there will be)

If for Bitcoin the Max Supply is 21 million, some cryptocurrencies have no unit cap, which has the effect of ousting this previously mentioned notion of scarcity.

Max Supply Bitcoin

Take the example of the dogecoin to compare :

Max Supply Dogecoin

There is no Max Supply, in other words, there is no ceiling to reach in terms of dogecoin units.

For the record, when dogecoin was created in 2013, it was expected that a maximum supply of 100 billion units would be established. But quickly the teams agreed not to cap the max supply and let unlimited dogecoin happen. Every minute, every time a block is mined on the blockchain, 10,000 dogecoins are created, which has the effect of constantly increasing the money supply in circulation. Here, the notion of rarity pales in comparison. As a reminder, the dogecoin was created as a joke in order to make fun of cryptocurrencies.

Market Capitalization

In traditional financial markets, market capitalization represents the value of a company. We can easily calculate it by taking the number of shares in that company and multiplying it by the stock price. In the cryptosphere, the approach is quite similar. The Market Cap is the value of the cryptocurrency on the market and is obtained by multiplying the current price by the circulating supply. For bitcoin it’s quite simple:

Bitcoin Market Cap

Supply in circulation: 19,042,425 BTC

Current price: $30,000

Capitalization = 19,042,118 x 30,000 = $571,000,000,000 (571 billion)

It is generally a good idea for any cryptocurrency to have a large market capitalization, because it means that the cryptocurrency or the company issuing a cryptocurrency has many investors. But market capitalization is important as a relationship between price and circulating supply, because a token with a very large circulating supply will usually have a small price per unit.

A high price and low circulating supply resulting in a high market capitalization is the ideal combination. Bitcoin is the perfect example.

Fully Diluted Market Cap (Current Price x Max Supply)

It is simply the Market Cap (market capitalization) when all the tokens will be in circulation. For example, for Bitcoin, when the 21 million bitcoins are mined (we estimate that this phenomenon will occur in 2140) we will obtain the Fully Diluted Market Cap. It is a projection of the Market Cap with all the tokens in circulation.

Fully Diluted Market Cap Bitcoin

Calculation of the Fully Diluted Market Cap:

21,000,000 x $30,000 = $632,000,000,000 ($630 billion)

For dogecoin, since there is no token cap, the Max Supply = Fully Dilluted Market Cap:

Fully Diluted Market Cap Dogecoin

Let’s finish with trading volumes.

Volume

Just as with traditional financial markets, trading volume is the number of shares that are traded in the market, in the cryptosphere, trading volume is the amount of cryptocurrency that is traded (bought or sold).

A large trading volume for a certain cryptocurrency is beneficial as it lends some credibility to the asset. This indicates that a large number of people are positioning themselves to buy and sell this cryptocurrency. In other words, it is liquid.

Bitcoin volume

The amount of this volume can obviously fluctuate depending on the demand for a cryptocurrency. Here for bitcoin, we can observe that there has been $29 billion traded in the last 24 hours, down 14.65% from the previous day. You will be able to observe fluctuations of several thousand percent on some recent cryptocurrencies injected, but be careful, you will notice that the amount of volumes are very low.

For example: if a newly created cryptocurrency shows a volume of $10,000 and all of a sudden, by manipulation, a group of dark traders moves it to $50,000, the change in volume will naturally change to +500%. This will have the effect of attracting the crypto-curious. But looking closer, $50,000 is a low volume next to bitcoin’s $29 billion in dollar volume. There is a good chance that, on such small cryptocurrencies displaying low volumes (in dollars) but with strong variations, that it is generally a question of manipulation leading to liquidity problems.

These indicators, which are easily accessible on a large number of data provider sites for all cryptocurrencies, constitute a first reading grid in the analysis of crypto-assets. In short, a limited supply in circulation (circulating supply) combined with a relatively low ceiling of units in circulation (max supply) constitute the first indicators of scarcity. A high capitalization (Market Cap) combined with a high trading volume indicates a relatively high demand for the asset in question.

In this article, the objective was to understand and interpret the main indicators that you see passing before your eyes on a regular basis. I’m concocting an article for you that pushes the plug a little further in the reading grid to determine whether the asset in question is inflationary or deflationary. Between slashing token issuance and burning tokens, the cryptosphere is full of must-have crypto techniques to master when it comes to investing. To be found very quickly in the columns of Zonebourse.



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