Crypto Token Supply: Why Is It Important For Your Investment In The Cryptocurrency Market?
Knowledge does not take up space and in the cryptocurrency ecosystem this can be the difference between success and failure. Knowing basic concepts of how the market works is a tool that helps traders make better decisions and adopt more efficient and profitable investment strategies. One of these fundamental concepts that must be understood is the supply of cryptographic tokens, this refers to the total number of coins or tokens that will exist for a given cryptocurrency. It is valid to clarify that this number may vary depending on the design and policy of each project and significantly impacts market supply and demand.
Why should we know about crypto token supply? Its importance lies in the fact that it directly influences the value of a cryptocurrency and its growth potential. Some of the factors that must be taken into account are:
📌 Scarcity: The smaller the supply of a cryptocurrency, the greater its scarcity and, therefore, its value. This is because supply is limited and demand can be high, putting upward pressure on the price. An example of this is Bitcoin, which has a maximum supply of 21 million coins and is the most valuable cryptocurrency on the market.
📌 Inflation: The greater the supply of a cryptocurrency, the greater its inflation and, therefore, the lower its value. This is because supply is plentiful and demand may be low, creating downward pressure on the price.
📌 Distribution: The way the supply of a cryptocurrency is distributed also affects the value and attractiveness to investors. A fair and equitable distribution implies that coins are distributed among many market participants, increasing the liquidity, security and decentralization of the network. An unfair and unequal distribution presupposes that currencies are concentrated in few hands, which reduces the liquidity, security and decentralization of the network.
It is also important to know that there are three main types of crypto token supply: circulating supply, maximum supply, and total supply.
📌 Circulating supply: Refers to the number of coins or tokens that are publicly available and circulating in the market. These are the currencies that can be bought, sold or exchanged at any time. The circulating supply can increase or decrease over time, depending on how coins are created or destroyed.
📌 Maximum supply: It is the upper limit of all coins or tokens that can exist for a cryptocurrency. This number is defined by each project's algorithm or protocol, and once it is reached, no more coins can be created. The maximum supply can be fixed or dynamic, depending on whether or not it can be modified in the future. Whether a cryptocurrency is inflationary or deflationary also depends on this (a concept that I will refer to later).
📌 Total supply: It is the total amount of coins or tokens that have been created so far for a cryptocurrency. This number includes both circulating supply and non-circulating supply, which are coins that have been reserved or locked for some specific purpose, such as rewards, incentives, or development. The total supply may be equal to or less than the maximum supply, depending on whether or not some coins have been burned.
By comparing the crypto token supply of different cryptocurrencies, traders will be able to make more informed investment decisions. To do this, they can use some metrics that help evaluate their value and potential, among which are:
📌 Market capitalization: It is the total value of all coins or tokens in circulation of a cryptocurrency. It is calculated by multiplying the current price by the circulating supply. Market capitalization allows you to compare the size and importance of a cryptocurrency in the market.
📌 Price: It is the individual value of a cryptocurrency. It is determined by market supply and demand. Price allows you to compare the cost and accessibility of a cryptocurrency.
📌 Circulating supply/maximum supply: It is the percentage of coins or tokens that have been issued and are in circulation with respect to the established maximum limit. It is calculated by dividing the circulating supply by the maximum supply. Circulating supply/maximum supply allows you to compare the degree of scarcity or inflation of a cryptocurrency.
📌 Total supply/maximum supply: It is the percentage of coins or tokens that have been created and exist with respect to the established maximum limit. It is calculated by dividing the total supply by the maximum supply. Total Supply/Max Supply allows you to compare the degree of burn or reserve of a cryptocurrency.
Needless to say, it is not necessary that we now have to start making calculations with paper and pencil in hand, all this data is available on platforms such as CoinMarketCap and in most Exchanges. The important thing is to have a basic knowledge of its origin and give that information practical use.
Another aspect to take into consideration when analyzing the supply of crypto tokens is the maximum supply of cryptocurrencies, which can be of the inflationary or deflationary type:
📌 Inflationary cryptocurrencies: Those that have an unlimited supply or that constantly increase the number of coins in circulation. This can lead to a loss of value or purchasing power of the currency over time: Ethereum (ETH), Monero (XMR), Dogecoin (DOGE), etc.
📌 Deflationary cryptocurrencies: Those that have a limited supply or that reduce the number of coins in circulation. Decreasing total supply and increasing scarcity can cause an increase in value or purchasing power of the currency over time, example Bitcoin (BTC) only 21 million coins.
By comparing the supply of crypto tokens of different cryptocurrencies you can evaluate their scarcity, inflation, distribution and burning. This determines the supply and demand of the asset, which affects its value and growth potential. By mastering this concept, traders will be able to take advantage of the full potential of the opportunities offered by the cryptocurrency market by making more informed and profitable investment decisions.
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