The circulating supply is an economic indicator implicit in all crypto assets because it determines the number of units of a cryptocurrency, or token. That is active and in constant exchange. It should not be confused with another indicator called “Total supply in the market” since this indicates the total amount of assets that have been generated from mining.
In a few words, the circulating supply shows us the liquidity of a cryptocurrency and how active it is, allowing us to know its receptivity in the market.
When a platform indicates the circulating supply of crypto, it’s only showing us the number of active cryptocurrencies available for exchange; within this count, those stored or frozen in some type of smart contract are not taken into account.
In theory, the circulating supply of a cryptocurrency does not affect it much because it is simply a statistic that is constantly changing as more units of a cryptocurrency enter circulation.
But if we look at it, taking into account other indicators such as the 24-hour trading volume of a cryptocurrency, it gives us a broad sample of the currency’s liquidity. In other words, it tells us how easy it is to buy or sell that particular crypto. This is an indicator highly valued by merchants since it is necessary to know if a cryptocurrency or token is accepted anywhere in the world to invest.
Of course, some crypto assets eliminate excess coins in circulation to control the price of the cryptocurrency. When we see an informative table of a cryptocurrency or token, we will find that the circulating supply can go up or down. This is because some cryptos can be stored inside smart contracts, leaving them out of the count for the supply stat, causing the supply stat to decrease.
Another factor that decreases this statistic is the elimination of burning of tokens or cryptocurrencies, and that is that some are designed only to exist for a certain time and then be eliminated, and more coins can be created. This is the case of DAI, which uses this mechanism to prevent its price from rising or falling to maintain its 1:1 parity against the US dollar, but this is not the only currency that applies this mechanism.
We must keep in mind that we will not always see the statistics decrease; some cryptocurrencies do not meet the characteristics mentioned above, so the circulating supply decreases. On the contrary, said supply will be increasing, and in some cryptocurrencies, this increase is a little faster than in others. An example of this is Bitcoin, which through mining increases the circulating supply every time new blocks are created; but due to the mining design of Bitcoin, it is estimated that the last BTC to go into circulation will be around the year 2140, while there are cryptocurrencies that were born long after Bitcoin and have already reached their maximum supply.
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The main reason is that there are cryptocurrencies that are designed to be stored in a smart contract or burned due to the design of the cryptocurrency or token itself, for this reason we will see that in some cryptos their supply will be reduced at certain times.
The theory indicates that when the circulating supply is equal to the maximum supply of a cryptocurrency, its price should present few variations and remain stable, where it could only be affected by supply and demand or by other external factors such as government restriction policies, among others.
The main reason is to maintain the value of a token or cryptocurrency because if we have many cryptocurrencies or tokens in circulation the same thing that happens when there is inflation in an economy would happen and the currency would lose value. As mentioned above DAI is a token that makes use of this method to maintain its value at 1 dollar, but there are also other types of tokens that are destroyed or burned either when used in payment for the use of a service or simply when redeemed for a physical good as is the case of Tether.