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This blog post explores crucial supply metrics in the cryptocurrency industry, emphasising their importance in assessing an asset's value, rarity, and market dynamics. It aims to bridge the knowledge gap for individuals with a traditional finance background by drawing clear comparisons between well-established financial concepts and new-age digital asset metrics.
In finance, whether traditional or digital, understanding the supply metrics of an asset is fundamental. These metrics offer a lens through which one can gauge an asset’s value, rarity, and market dynamics.
This blog post aims to explain the key supply metrics in the cryptocurrency sector, providing clear comparisons with traditional financial concepts to assist those from a conventional finance background in grasping these new-age digital metrics.
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Definition: Max Supply denotes the total quantity of coins or tokens that will ever exist for a cryptocurrency or token. This includes all varieties: those currently in circulation, those locked or reserved, and those that are planned to be created in the future but have not yet been issued. It’s a critical figure that sets the upper limit for the asset’s availability.
For most tokens, we set this figure to -1, indicating that the supply may potentially increase. Only for those tokens where we can guarantee, based on extensive research, that the supply will not increase, do we set a definitive upper cap.
In the digital asset space, the assurances regarding Max Supply are significantly higher compared to traditional finance. If a cryptocurrency’s protocol defines a maximum supply, this limit is typically enforced by the blockchain’s underlying code, making it immutable.
To increase the Max Supply beyond its predefined limit would require a hard fork, a radical change to the network’s protocol that creates a divergent chain. This process involves consensus from the network’s stakeholders and is not undertaken lightly, as it can lead to significant disruption and division within the community. Therefore, the Max Supply of a cryptocurrency offers a strong guarantee of scarcity, akin to the physical limitations of precious metals like gold, but with the added enforcement of cryptographic principles.
Max Supply in the cryptocurrency world is akin to a company’s authorised share capital in traditional finance. Authorised share capital is the maximum amount of share value that a company is authorised to issue to shareholders. It represents the potential full extent of equity that a company can leverage, though not all authorised shares are issued at once and some may never be issued at all.
Traditional Finance Definition: Authorised share capital is the total value of shares that a company can legally create and issue. This figure is specified in the company’s articles of association and can be increased through shareholder approval. It sets a cap on the equity financing a company can obtain through the issuance of shares.
Use Cases: In the crypto space, understanding Max Supply is vital for investors and analysts as it provides insight into the potential market saturation and inflation of an asset. An asset with a finite Max Supply is often considered more valuable due to its scarcity, akin to a precious metal like gold. The designation of -1 for Max Supply in our metrics serves as an important indicator for investors, signalling that the supply of these tokens is not fixed and could potentially increase, which is a critical consideration for investment and valuation purposes.
Interplay and Parallels: Just as a large authorised share capital can signal potential future dilution of a company’s equity value, a large Max Supply in crypto can indicate future inflationary pressure on the asset’s value. Conversely, if a significant portion of the Max Supply is already in circulation, it suggests limited inflationary risk, similar to a company that has already issued a substantial proportion of its authorised shares. Investors in both traditional finance and cryptocurrency markets use these metrics to assess the long-term supply-side pressure on value and make informed investment decisions. The -1 designation is a unique aspect in the crypto world, offering a nuanced view of the asset’s supply dynamics compared to the more static nature of authorised share capital in traditional finance.
Definition: Total Supply represents the sum of all units of a particular cryptocurrency or token that have been issued or created and are in existence, minus any that have been verifiably destroyed or burnt. It includes coins or tokens that are circulating in the public market, those that are locked or reserved, and excludes any that have been intentionally removed from the supply.
Traditional Finance Comparison: Total Supply in the cryptocurrency context is analogous to the total number of a company’s issued shares minus any treasury shares in traditional finance. Treasury shares are those that were once part of the outstanding shares but were later repurchased by the company and are held in the company’s treasury. They are not considered when calculating earnings per share or dividends, and like burnt tokens, they do not have voting rights or pay dividends.
Use Cases: For cryptocurrencies, Total Supply is a critical metric for investors and market analysts as it helps in determining the market capitalisation of the asset, which is calculated by multiplying the Total Supply by the current market price of the asset. It provides a broader perspective on the asset’s valuation than just the Circulating Supply, offering insights into how many tokens are actually out there, including those not currently available for trade.
Interplay and Parallels: The distinction between Total Supply and Circulating Supply is akin to the difference between total issued shares and public float in traditional finance. Just as the public float provides insights into the number of shares available for trading to the general public, excluding restricted or insider-held shares, the Circulating Supply offers a view into the tokens available for public trading, excluding those that are locked or held in reserve. This comparison helps investors in both fields understand the liquidity of an asset, its potential for price volatility, and its true market value, as the availability of an asset for trading can significantly influence its price and investment attractiveness.
Definition: Locked Supply refers to the portion of a cryptocurrency’s total supply that is not available for immediate trading or transfer due to various restrictions. These restrictions can include tokens that are held in escrow, allocated for future use by the project team, or locked as part of staking or other network participation mechanisms.
Traditional Finance Comparison: The concept of Locked Supply in the crypto world is akin to restricted stocks in the traditional finance sector. Restricted stocks are shares that are issued to company insiders but come with conditions on their sale or transfer. These conditions are often imposed to align the interests of the employees or executives with the company’s long-term success.
Use Cases: Understanding the Locked Supply is essential for investors and analysts as it provides insights into the future circulating supply and potential market pressure. If a large portion of an asset’s total supply is locked, it can indicate a lower risk of market dilution in the short term. However, as these tokens become unlocked and enter the circulating supply, they can impact the asset’s price and liquidity.
Interplay and Parallels: Just as the release of restricted stocks into the market can affect a company’s stock price and investor perception, the transition of Locked Supply into Circulating Supply can have significant implications for a cryptocurrency’s market dynamics. For instance, if a large batch of previously locked tokens becomes tradable, it could increase the supply side pressure on the asset, potentially leading to price depreciation if the demand does not increase proportionally. This dynamic is crucial for investors to monitor as it can provide early signals about potential future movements in the asset’s market value and liquidity.
Definition: Staked Supply refers to the quantity of tokens that are currently locked within a network’s staking process. In proof-of-stake (PoS) and similar consensus mechanisms, holders can commit their tokens to the network to participate in block validation and network governance. These staked tokens are not immediately available for trading as they are locked for a certain period, contributing to the network’s security and operational efficiency.
Traditional Finance Comparison: Staked Supply in the cryptocurrency context is analogous to funds placed in fixed-term deposits in traditional finance. Just like how funds in a fixed-term deposit are locked for a predetermined period and earn interest, staked tokens contribute to network security and, in return, earn staking rewards for their holders.
Use Cases: The Staked Supply metric is crucial for understanding the level of holder commitment and network security. A high Staked Supply indicates strong holder participation and can signify a more secure and robust network. For investors and network participants, understanding the Staked Supply helps in assessing the network’s stability and the potential for earning staking rewards.
Interplay and Parallels: Just as the maturity of fixed-term deposits affects the liquidity and interest rates in traditional finance, the release of Staked Supply back into circulation can impact the liquidity and market dynamics of a cryptocurrency. When a significant amount of staked tokens becomes unlocked, it could increase the circulating supply, potentially affecting the asset’s price if the market doesn’t absorb the additional supply effectively. Conversely, a high Staked Supply reduces the circulating supply, which can lead to a decrease in liquidity but might increase the price due to the perceived scarcity and holder commitment to the network’s success.
Definition: Issued Supply encompasses all coins or tokens that have been created, distributed, and are currently in existence. This metric includes tokens that are in circulation, locked, staked, or held in any other form after being released from the total supply. It represents the comprehensive amount of the asset that has been issued up to the current point in time.
Traditional Finance Comparison: Issued Supply in the cryptocurrency context is analogous to the total number of shares a company has issued over its lifetime in traditional finance. Just as a company’s issued shares include all shares that have been sold to investors plus those distributed to company insiders or held as treasury shares, Issued Supply includes all tokens that have been mined, created, or otherwise brought into existence and distributed.
Use Cases: Analysing the Issued Supply provides a holistic view of an asset’s distribution and availability. It helps investors and analysts understand the scale of an asset’s issuance and how broadly or narrowly it is distributed. This metric can inform decisions regarding the asset’s valuation, market potential, and the maturity of its market.
Interplay and Parallels: Just as understanding the total issued shares of a company can offer insights into its capital structure, market capitalisation, and potential for dilution, the Issued Supply of a cryptocurrency gives a snapshot of its market presence and distribution dynamics. Investors can assess if an asset is widely held or if a significant portion is concentrated among a small number of holders, which can have implications for market liquidity and price stability. Additionally, changes in Issued Supply, such as new token issuances or the burning of existing tokens, can have direct impacts on the asset’s market value, similar to how secondary offerings or buybacks can affect a company’s stock price.
Definition: Future Supply refers to the quantity of tokens or coins that are planned or scheduled to be issued in the future but have not yet been created or distributed. This metric is crucial for understanding the potential increase in the total supply of an asset and helps in anticipating how the market might absorb this additional supply.
Traditional Finance Comparison: The concept of Future Supply in cryptocurrencies is comparable to a company’s planned or announced future share issuances in traditional finance. Just as companies might announce future share issuance plans to raise capital, which can lead to dilution of existing shareholders’ equity, cryptocurrency projects can have predefined schedules or conditions under which new tokens will be created and released into the market.
Use Cases: For investors and market analysts, understanding the Future Supply is vital for making informed decisions. It helps in forecasting the asset’s inflation rate, assessing potential dilution effects, and understanding how the increased supply might impact the asset’s price and market capitalisation. It’s particularly important in PoS and PoW/PoS hybrid systems where future token issuance is a known factor.
Interplay and Parallels: Just as the announcement of future share issuances in the traditional market can impact a company’s stock price by changing investor expectations regarding future earnings per share and ownership dilution, the known Future Supply in the crypto market can influence the asset’s price. If investors anticipate a significant increase in the total number of tokens, they might adjust their valuation models accordingly, potentially leading to price changes even before the new supply is issued. Understanding the planned issuance schedule allows investors to anticipate market movements and make strategic investment decisions based on expected changes in supply and demand dynamics.
Definition: Circulating Supply is the subset of the total supply that is actively available for trading and not held in reserve or locked. It excludes any tokens or coins that are vested, locked in staking, or otherwise not freely tradable on the market. This metric is crucial for understanding the liquidity and accessibility of an asset in the current market.
Traditional Finance Comparison: The Circulating Supply in the cryptocurrency market is similar to the public float in the stock market. Public float refers to the number of shares of a company that are available for public trading, excluding locked-in shares like those held by company insiders and major stakeholders. The public float provides an indication of the number of shares that can actually change hands in the market.
Use Cases: Circulating Supply is essential for calculating the real-time market capitalisation of a cryptocurrency, which is determined by multiplying the Circulating Supply by the current price of the asset. This calculation provides a more accurate representation of an asset’s current market value. Additionally, it’s used to analyze the liquidity of the asset, as a higher Circulating Supply typically indicates more liquidity and easier trading.
Interplay and Parallels: Just as the public float is a critical metric for investors and analysts in traditional markets, providing insights into the stock’s volatility and market perception, Circulating Supply plays a similar role in the cryptocurrency market. It affects how investors perceive the asset’s value and liquidity. An increase in Circulating Supply, for instance, can dilute the asset’s value if demand doesn’t keep pace, while a decrease can lead to higher volatility and potentially increase the price if demand remains strong. Understanding this dynamic helps investors gauge the potential for market movements and make informed investment decisions.
Definition: Burnt Supply refers to the portion of tokens that have been intentionally destroyed or made permanently inaccessible, effectively reducing the total supply of the asset. This process is irreversible, ensuring that the burnt tokens cannot re-enter circulation or be used again.
Traditional Finance Comparison: The concept of Burnt Supply in the cryptocurrency context is analogous to the practice of share buybacks and subsequent retirement of those shares in traditional finance. When a company buys back its own shares, it can choose to retire these shares, thereby reducing the total number of outstanding shares, which can influence the company’s stock value and earnings per share.
Use Cases: Burnt Supply serves as an indicator of deflationary pressure within a cryptocurrency’s economy. By permanently reducing the number of tokens in existence, burning can increase the scarcity of the remaining tokens, potentially enhancing their value. This mechanism is often used by projects to demonstrate commitment to the asset’s long-term value or to adjust the supply in response to changes in demand or economic conditions.
Interplay and Parallels: Just as share buybacks and retirements can be a positive signal to investors in traditional markets, indicating that the company believes its stock is undervalued or that it is committed to increasing shareholder value, Burnt Supply in the crypto market can have a similar positive impact on investor perception. By reducing the available supply, burning can increase the rarity of the tokens and, if demand remains steady or increases, can lead to an appreciation in the asset’s price. This strategic move is often welcomed by investors as it demonstrates a proactive approach to managing the asset’s economy and can lead to increased investor confidence, similar to the effects of share buyback programs in the traditional financial sector.
In bridging the worlds of traditional finance and cryptocurrency, understanding the supply metrics of digital assets is not just about translating new concepts into familiar terms; it’s about recognising the fundamental economic principles that underpin all markets. The metrics we’ve explored — Max Supply, Total Supply, Circulating Supply, and others — serve as the backbone for evaluating digital assets, much as similar metrics provide insight into the valuation and market behaviour of traditional securities.
The parallels drawn between the two realms underscore a universal truth: whether dealing with stocks or tokens, the principles of supply and demand, market liquidity, and investor behaviour hold. By grasping these supply metrics, individuals from traditional finance backgrounds can apply their analytical skills to the crypto market, uncovering opportunities and navigating risks with greater confidence.
Moreover, this cross-disciplinary understanding fosters a broader perspective, enabling professionals to adapt to evolving markets and innovate. As digital assets continue to mature and intertwine with traditional financial systems, the ability to navigate both worlds becomes an invaluable skill, blending the old with the new to create a more interconnected and versatile financial landscape.
In conclusion, while the medium may change — from shares to tokens — the core concepts of financial analysis remain constant. By embracing these parallels, we not only demystify the world of digital assets but also empower ourselves to thrive in this new financial paradigm, making informed decisions that are rooted in both tradition and innovation.
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