Token supply plays an important role in terms of its price, its perception by market participants and its utility by users.
If you plan to make your token a transactable currency, it usually makes sense to create a larger supply because then you can price items in whole numbers rather than decimals. An NFT with a price of 5 xyz tokens is easier for the average buyer to compute than one that has a price of 0.05 xyz tokens.
Tokens with a large supply like 1 billion+ tend to be priced lower, around $10 or less, while tokens with a low supply like 21 million are more likely to be priced higher, $100 or more.
Even though tokens are divisible, many investors tend to fall for ‘unit bias’.
Unit bias is the tendency to believe that a single unit of a token that is priced at $5, $1 or $0.50 is cheaper than a single unit of a token that is priced at $1,000 or $10,000, even though the total supply of each token may be completely different.
The phenomenon is most commonly noticed with cryptocurrencies like Dogecoin or tokens like Shiba Inu where the price is less than $1, yet the supply is over 1 billion.
By contrast, Bitcoin has a price of $19,000 (at the time of writing) but its supply is only 21 million.
Circulating Supply is the total supply that is currently trading on the market.
Think of this as the total amount of a token that anyone can currently buy on a DEX or CEX. The remaining supply that is not circulating is usually locked by project teams that plan to release it according to a schedule.
Team members will often have a large percentage of their tokens locked in a smart contract for a period of time as an incentive to continue working on the project, this is called a vesting schedule.
Oftentimes the non-circulating supply of a token slowly becomes circulating through staking or through fees earned from liquidity pools that are denominated in that token.
The maximum supply of a token that will ever exist.
When designing a token, you have the option to choose what the maximum supply will be from the beginning. Once this is chosen, it can never be changed.
Not every token has to have a maximum supply. You can set your token to have an infinite supply that increases at a steady rate of 1 or 2% per year.
This inflation based design will make your token function more like traditional fiat currencies do today.
One benefit of launching a token on a blockchain versus using central bank controlled fiat currencies is that you can set an inflation rate that is transparent for everyone to see and does not ever change. This gives users more trust in your token because they don’t have to worry about the creator changing the inflation rate down the road, which would affect their perception of the token’s value and utility.
The current trading price of your token.
Token prices are often denominated in dollars, but can also be denominated in Bitcoin or ETH.
Many investors like to track the price of a token in ETH or BTC terms to determine whether it has performed better than those assets in the market.
Market capitalization is equal to the circulating supply of a token multiplied by its price.
This gives you a good indicator of the current value of the project based on the available tokens that are trading on the market.
Fully Diluted Valuation
FDV is equal to the maximum supply of a token multiplied by its price.
This often gives you a more accurate reading on the value of a project because it shows you what the market is valuing the project if all of its tokens were currently available for trading.
Users will often compare circulating supply to maximum supply in order to gauge how much potential selling pressure will be placed on the token in the coming months or years.
For example, if a token has a circulating supply of 1 million but a maximum supply of 10 million, this can indicate that 90% of the token’s supply will potentially be sold as soon as, or shortly after it becomes available for trading.
Investors evaluate this to determine how negatively it might impact the current price (it is often seen as a bearish indicator).
On the other hand, a token with a circulating supply of 9 million and a maximum supply of 10 million is likely already priced at exactly where the market thinks it should be relative to the additional 10% of supply that has yet to become available.
Users will also compare market cap and FDV in order to gauge whether a project’s current valuations are realistic compared to more established projects.
A token with a circulating supply of 1 million and a maximum supply of 10 million will have an FDV that is 10 times higher than its circulating supply. So if the token price is $10, its market cap is $10 million, but its FDV is $100 million.
Token issuance rate, or inflation rate, is the rate in which new supply of tokens are created or released unto the market.
Even though a low circulating supply to maximum supply ratio can send bearish market signals for the token price, it is often the most practical design to adopt for projects that need to leverage their token to create incentives for user adoption overtime.
In order to do this, many projects choose to keep a large percentage of the token supply locked so that they can release it slowly as rewards for yield farming, staking, earning through gameplay, etc.
However, just as important as understanding how circulating and maximum supply can impact price, one must also understand how the token issuance rate can impact price in the short term and long term.
If we take our example from earlier, a token with a circulating supply of 1 million and a maximum supply of 10 million might not be seen as bearish if additional 9 million tokens do not get released onto the market for the next 10-20 years.
However, if those same tokens are to be released to the market in 1 year, it would be seen as very bearish.
A slow issuance rate allows the market more time to absorb the selling pressure. If you flood users with too much of a supply of your token too soon, the signal you are sending to the market is that the token is of low value and should be sold as soon as it is acquired.