Crypto Metrics (Part 1): Supply
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Crypto Metrics (Part 1): Supply
Crypto metrics are essential indicators that help investors & traders understand the performance & potential of blockchain tokens.
Crypto metrics are essential indicators that help investors & traders understand the performance & potential of blockchain tokens.
Crypto Metrics are primarily divided into 10 categories:
Supply Metrics
Capitalization metrics
Volume
Price Metrics
Holders' Statistics
Return on Investment
DeFi metrics
Consensus metrics
Staking metrics
Mining metrics
Today's post covers Supply Metrics which comprise:
Circulating Supply
Total Supply
Maximum Supply
Inflation
Stock to Flow
Vladimir Club Cost
1. Circulating Supply
Circulating supply refers to the number of tokens that are publicly available and actively circulating in the market. It represents the portion of the total supply that investors can buy, sell, or trade.
The circulating supply can change over time due to various factors such as:
mining,
staking,
burning, or
token release schedules.
Circulating supply is a crucial metric because it directly impacts a token's market capitalization (market cap).
Market cap is calculated by multiplying the current market price of a token by its circulating supply.
Market cap = Current Price x Circulating Supply
This value helps investors compare the relative size & worth of different tokens, providing insights into their potential risk & return profiles.
A lower circulating supply may suggest scarcity and higher demand, possibly leading to a price increase.
Conversely, a higher circulating supply could indicate that a token is more readily available, potentially making it less valuable.
Examples:
Bitcoin: 19,363,612 BTC
Ether: 120,375,862 ETH
Shiba Inu: 589,542,157,859,369 SHIB
2. Total Supply
Total Supply refers to the number of tokens in existence, including those in circulation and those held in reserve, locked, or not yet released.
The total supply may change over time as new tokens are mined or created, or existing tokens are burned or destroyed.
Examples:
Bitcoin: 19,363,612
Ether: 120,375,862
3. Maximum Supply
Maximum Supply is the predetermined maximum number of tokens that will ever exist for a particular project.
Once the maximum supply is reached, no new tokens will be created. This limit is often imposed to maintain scarcity & value.
Examples:
Bitcoin: 21,000,000
Ether: Unlimited
4. Inflation
Inflation refers to the increase in the supply of a particular token over time, which can affect its value & purchasing power.
Unlike traditional currencies managed by central banks, blockchain tokens often have predetermined issuance schedules and supply limits coded into their protocols.
Inflation in tokens typically occurs through the process of mining or staking, where new coins are issued as rewards to participants who validate transactions and secure the network.
Inflation = Projected 12-month increase in CS / Current CS
The rate of inflation varies across different projects, depending on their issuance model, block rewards, and supply caps.
Mining
In proof-of-work (PoW) tokens like Bitcoin, new coins are created through mining, where miners compete to solve complex mathematical problems to add new blocks to the blockchain.
The successful miner receives a block reward in the form of newly minted coins, contributing to the increase in circulating supply.
Staking
In proof-of-stake (PoS) and delegated proof-of-stake (DPoS) tokens like Ether, new coins are issued to validators or delegators who lock up or "stake" their coins in the network.
The new coins are distributed as rewards for validating transactions and maintaining network security.
Impact of Inflation
Inflation can have several effects on the value & dynamics of tokens:
Dilution of Value: When new coins are issued through mining or staking, the value of existing coins may be diluted, potentially impacting long-term holders.
Incentive for Network Participants: Inflation can serve as an incentive for miners, validators, and stakers to participate in the network, promoting decentralization and security.
Deflationary Mechanisms: Some tokens, like Bitcoin, employ deflationary mechanisms such as halving events, where block rewards are reduced over time. This approach can counteract inflation, ensuring scarcity and potentially increasing the value of the digital asset.
5. Stock to Flow (S2F)
The Stock to Flow model is a widely-used valuation tool for commodities like gold & silver, and it has been adapted to analyze cryptocurrencies like Bitcoin.
It is a ratio that compares the existing supply (stock) of an asset to its annual production rate (flow).
S2F = Stock / Flow
Stock to Flow = Current CS / Projected 12-month increase in CS
In the context of cryptocurrencies, the stock represents the circulating supply of coins, while the flow refers to the rate at which new coins are created (e.g., through mining).
According to the S2F model, an asset's value is directly related to its scarcity, with a higher S2F ratio indicating greater scarcity and potentially higher value.
6. Vladimir Club Cost
The Vladimir Club is the cost of owning 1% of 1% of a crypto's eventual supply.
Example: Bitcoin's maximum supply is 21 million coins. To be "in the Vladimir Club" for Bitcoin, you would need 21 million x 0.01 x 0.01 i.e. 2100 BTC.