Understanding how the circulating supply, max supply and market cap can be the difference between 100x and getting rekt.
"Tokenomics* refers to the financial system behind a cryptocurrency. It covers how a project creates, distributes, and uses tokens. By understanding tokenomics, you can evaluate a project's value, growth potential, and how the token might perform over time."*
As inflation spirals globally, governments respond by printing more fiat currency—dollars, pounds, and dong (yes, that's a real currency, get your head out of the gutter). What might seem like an easy fix—"our government is in debt, let's print more money" - instead fuels rising costs for groceries, fuel, and utilities. As a result, the value of your savings shrinks, and every hard-earned pound depreciates in value. Very sad, I know.
There is a simple premise to this devaluation: The more abundant an item or commodity is, the less value it holds. People wouldn't be willing to pay more than a couple pounds for a loaf of bread. However, collectors would spend 10's of millions for a Faberge egg, of which only 57 of the original 69 created remain.
But what does a Fabergé egg have to do with that project your favourite influencer just shilled—"ShibaInuSpunkRocket69000"? The same concept applies to cryptocurrencies and digital assets, just as the rarity of the Fabergé egg drives its value. When something is scarce, it often becomes more valuable. However, in crypto, scarcity can takes a different form. This brings us to the critical distinction between max supply and circulating supply. While a project might have a high max supply, the number of tokens in circulation influences its market value.
Now, if you head over to Coingecko and search for a project, you will be greeted by a snapshot of a project's tokenomics.
Market Cap ($54,077,720): The total value of all tokens currently available to trade, based on the current price.
Fully Diluted Valuation ($54,321,747): The project's total value if every single token that could exist was available and priced like it is today.
24-Hour Trading Volume ($2,671,778): The amount spent trading the token in the last 24 hours.
Circulating Supply (97,559,759): The number of tokens currently available and being bought and sold.
Total Supply (98,000,000): All the tokens that exist now, even the ones that aren't available for trading yet.
Max Supply (1,000,000,000): The limit on how many tokens will be created for this project.
While these might seem like arbitrary numbers at first glance, they provide some critical insights.
Max Supply:
In the above example, the maximum supply is 1 billion tokens, much bigger than Bitcoin's 21 million. A higher supply usually means the token has specific uses, like staking, voting, or rewarding people who help the network. The project needs enough tokens to keep things running smoothly—running out would be a disaster. Some projects, like Ethereum ($ETH), even have systems that can reduce the total number of tokens over time to keep things balanced and avoid inflation.
Circulating Supply:
In the above example, almost all the tokens are already in circulation, which is a great sign for investors. Many projects give token allocations to early investors, like venture capitalists and partners. These allocations stay locked up during a "vesting period" (basically, they can't sell yet). This stops early investors from dumping the token at launch, which would wreak all sorts of havoc on the liquidity pools and token price. If they were allowed to do this, you would see a chart that resembles this monstrosity. A new token will only have limited demand, which is usually based on speculation. This means an influx of supply (from early investors selling) will cause the token price to go to the pits of Mordor, scaring off any potential future investors.
Market Cap:
Here's the final stat that will connect the above. The market cap is how we value a project; you can calculate it using a simple equation.
Market cap* = Circulating Supply X Current price of the token*
This information gives you a realistic idea of future price predictions. Here are some practical examples to help explain how this works.
Token A
Price: $0.10
Circulating Supply: 10 million tokens
Market Cap: $1 million
Token A looks cheap at $0.10, but its market cap is only $1 million because there are few tokens in circulation. This means that even a slight increase in demand could push the price up quickly, as the Supply is relatively limited.
Token B
Price: $0.01
Circulating Supply: 10 billion tokens
Market Cap: $100 million
Token B looks cheap at just $0.01, but be aware! Because there are so many tokens in circulation, its market cap is a hefty $100 million. Even though the price seems low, this project is already quite large, and it would take a lot of new investment to significantly increase the price.
Token C
Price: $2.00
Circulating Supply: 500,000 tokens
Market Cap: $1 million
Token C has a higher price of $2.00, but with only 500,000 tokens in circulation, its market cap is still just $1 million. This shows that a higher price per token doesn't always mean the project is valued higher—it all depends on the circulating Supply.
With the above information, you can ensure you don't fall into the trap of buying a token "because it's so cheap" when the circulating supply and market cap may tell a different story.
Supply And Demands Dynamics
Great. Now that we understand all the main tokenomics metrics for a project, there's one final piece to this puzzle: Supply and demand.
Remember the Wolf of Wall Street scene where Brad sells Jordan the pen? The same principles work here. Think of tokens like concert tickets. If there are only a few tickets (low Supply), but many people want to go to the concert (high demand), the ticket prices will shoot up because they're hard to get. But if the venue releases many extra tickets (high Supply), the ticket price will drop because they become more accessible.
In the same way, with cryptocurrencies, when the Supply of tokens is limited and people want them, prices go up. However, the price will fall if too many tokens are available and demand doesn't keep up.
As an investor, it is up to you to assess this risk when entering a mid to long-term position.
You can use this framework for making a decision:
Are all the tokens in circulating Supply? -> Yes -> perfect, go buy, put your feet up, watch some Netflix
Are all the tokens in circulating Supply? -> No -> Check what percentage of tokens are in circulating Supply -> Begin carrying out Due Diligence on token unlocks and vesting schedules (but this is a whole other topic)
Essentially, you need to be able to answer this question before making a long-term investment in a project with a lower percentage of circulating supply.
"Do I think that the token utility and investors' speculation for this project will outpace selling pressure from an increasing supply of tokens?"
If you believe that the token utility, marketing, and the project have a great community, your answer may be yes. But don't forget, everything's a shitcoin and your fave project will go down 60/70/80/90%+ from ATH. Enjoy.