The valuation of digital assets is frequently represented through two key metrics: market capitalization (market cap) and circulating supply. Investors who already have an understanding of both concepts recognize that each metric offers distinct insights into the current state and potential future growth of a cryptocurrency in both scale and price.
Market cap is calculated by multiplying the current price of a single unit of a cryptocurrency by its total circulating supply. For example, if a cryptocurrency has 1 million coins in circulation and each coin is worth $10, the market cap would be 1 million multiplied by $10 which equates to a market cap of $10 million.
Some reasons the market cap is highly useful for investors to strategize on before deploying capital into a cryptocurrency:
Market cap is a primary indicator of a cryptocurrency’s size within the market. Generally, a higher market cap suggests a more established and stable asset, which might appeal to risk-averse investors.
Conversely, smaller market caps often indicate newer or less established assets, which could offer higher growth potential but with increased risk.
Changes in market cap over time can indicate broader market trends. A growing market cap might suggest increasing investor confidence, while a declining market cap could signal a loss of investor interest or confidence.
Market cap can be a useful tool for assessing the risk level of an investment. Larger market caps tend to be associated with lower volatility, making them potentially safer investments compared to smaller Market caps, which can be more volatile and speculative.
Circulating supply refers to the number of cryptocurrency coins or tokens that are publicly available and circulating in the market. It excludes coins that are locked, reserved, or not available for public trading.
For example Bitcoin currently has 19.5 million coins in circulation with the 21st million coin to be mined in the year 2140.
Some reasons the market cap is useful for investors when strategizing on which cryptocurrencies to invest in:
Circulating supply helps in assessing the liquidity of a cryptocurrency. A higher circulating supply often means better liquidity, making it easier to buy or sell without affecting the price too much.
Understanding circulating supply can provide insights into potential inflationary pressures. A large supply being released into the market can dilute the value of existing coins.
Cryptocurrencies with a limited supply, like Bitcoin, can create a scarcity factor, potentially increasing demand and value over time.
The circulating supply of Bitcoin (BTC) is notably high, with approximately 19.5 million out of the total 21 million coins already in circulation. This situation is primarily due to the unique design of Bitcoin’s issuance schedule and the concept of halving events, which are integral to its supply mechanics.
Bitcoin’s high circulating supply of approximately 19.5 million out of 21 million is due to its initial design, which allowed for rapid coin generation through mining, with a total supply capped at 21 million.
Halving events, occurring approximately every four years, or 210,000 blocks, halve the mining rewards, thus slowing down the rate of new Bitcoin creation and contributing to its scarcity over time.
The early years of Bitcoin saw a faster increase in circulating supply due to higher block rewards, but post-halving, this rate has significantly slowed.
Over 90% of Bitcoin’s total supply has been mined, and as it nears its 21 million cap, the remaining bitcoins become increasingly scarce.
The halving events and capped supply control inflation and enhance Bitcoin’s value as a scarce digital asset, akin to gold.
In a futuristic scenario where most of the Bitcoin has been mined and mining rewards are significantly lower than what they have been over the last decade, several key factors could begin to shape the price dynamics of Bitcoin. Some of these include:
As Bitcoin nears its 21 million cap, its rarity grows, potentially boosting its value like gold, especially if demand stays strong or grows while new supply dwindles.
Future Bitcoin mining profitability hinges on its market price, whereby lower rewards could lead to industry consolidation, favoring only the most efficient miners.
With diminishing block rewards, miners may rely more on transaction fees, possibly raising costs but also spurring innovations for cheaper, faster transactions.
As most Bitcoin gets mined, expect a shift towards a more stable market, reducing volatility and attracting more institutional investment, reinforcing Bitcoin’s status as digital gold.
Gold has long been a cornerstone of financial security, with its market capitalization at $12 trillion dollars , a testament to its centuries-old status as a reliable store of value. This valuation is derived from the cumulative amount of gold mined and its prevailing market price.
Since Bitcoin’s inception it has been marked by an increase in both value and market cap, which has outperformed all traditional asset classes in its first decade. This remarkable growth trajectory indicates its potential to rival or even exceed gold’s market cap in the future, particularly as it gains broader acceptance and legitimacy as a store of value and an inflation hedge.
The increasing institutional investment and the growing involvement of major financial entities in the cryptocurrency space signal a significant shift in perception towards Bitcoin, aligning it closer to gold’s esteemed status in the financial world.
In a world where the market cap of Bitcoin is equal to Gold, this would mean the price of one Bitcoin will be equivalent to roughly $500K per coin as has been envisaged by Bitcoin whale and bull Michael Saylor .
Market cap and circulating supply are two fundamental concepts in cryptocurrency that offer different yet complementary views. Market cap helps in understanding the market value and stability of a cryptocurrency, while circulating supply provides insights into liquidity, potential inflation, and scarcity.
Together, these metrics are invaluable for anyone looking to understand or invest in the cryptocurrency market, offering a more comprehensive picture of a digital asset’s current state and potential future trajectory.
What is market cap and why is it important in cryptocurrency?
Market Cap is calculated by multiplying a cryptocurrency’s current price with its circulating supply. The result will indicate and quantify the total market value of the asset, providing insights into said asset’s size and stability.
How does circulating supply impact a cryptocurrency’s liquidity?
Circulating Supply is the number of coins available for trading, which directly affects a cryptocurrency’s liquidity. A higher supply typically means better liquidity, facilitating easier buying and selling.
Why is Bitcoin’s circulating supply so high, nearing its total cap?
Bitcoin’s high circulating supply, with over 19.5 million coins mined, is due to its initial rapid coin generation rate and the halving events, which gradually reduce new coin creation.
How might Bitcoin’s price be affected as it nears its maximum supply?
As Bitcoin approaches its 21 million cap, increased scarcity could boost its value, especially if demand remains strong, while changes in mining economics and transaction fees could also influence its price.