Circulating supply is the best approximation of the number of coins or tokens currently active in the crypto market and in the hands of the general public.
Supply and demand are at the root of our economies and the businesses and services within them. A shortage of workers creates demand for workers. A hot new widget that everybody wants creates demand and businesses frantically make products to meet the demand. The amount or rather scarcity of available workers to fill open positions or the number of widgets available to buy helps to dictate or even elevate the price.
##A simple example of supply and demand dynamics
Let's say you want to sell your car. It is a VW Golf GTi, with an average amount of kilometres and is in average condition. The demand for your car will be pretty average as there will no doubt be many other cars like yours on sale. Now instead, imagine that your VW Golf is in like-new condition and has very few kilometres, this makes your car more valuable as there are fewer cars like yours available to buy and therefore there is greater demand for yours and this will push the price of yours up. If more cars like yours enter the used market, the price of yours will come down as buyers have more choice.
So, what does this have to do with crypto you might ask? Well, the price of crypto very much like stocks and shares is driven by demand and supply amongst other things.
##What is circulating supply in crypto?
Circulating supply is the approximate amount of coins or tokens currently in circulation and in the hands of the public. What does this mean exactly? Let's start from the very beginning and use the biggest and best-known crypto, bitcoin as an example. When bitcoin was created, the mysterious Satoshi Nakamoto "hardcoded" the total amount of bitcoins that will ever exist, 21 million to be exact. This means that there will never be more than 21 million bitcoins in existence. This limit creates scarcity, just like with gold or oil. There is only so much out there and this keeps the price high and rising as it generally has with bitcoin. If we think of an alternative and certainly way more valuable commodity, water, the price is very low, this is because there is so much supply, water is generally available everywhere. If this heaven forbid changed, the price would skyrocket as we literally cannot live without it. Going back to bitcoin, the 21 million is not the circulating supply but rather the max supply, the maximum amount there will ever be. The circulating supply of bitcoin was 18.82 million on 14th September 2021. This 18.82 million refers to the actual amount of bitcoin in circulation and is potentially available to buy and sell. We haven't yet reached the 21 million as those coins have yet to be mined and are therefore not yet available and not in circulation.
Now that we hopefully understand what circulating supply is we can look in a little more detail at what max supply and total supply are.
##What is max supply?
The max or maximum supply of a crypto coin or token refers to the maximum amount of coins or tokens that will ever be produced. Taking the earlier example of bitcoin above, the max supply would be 21 million coins. No more bitcoin will ever be produced. Those same 21 million coins will make up the total supply globally for eternity. This is very different to fiat currencies like the GBP, Euro or US Dollar where the respective central banks can and do continue to issue more money into the economy and there is no max supply limit.
##What is total supply?
The total supply is the number of coins or tokens that currently exist, either in circulation or locked up in some way and have yet to be released onto the market. This could be for example that they are in some form of escrow or similar situation. So, the total supply is the total supply of coins to date minus the total number of coins or tokens that have been burned or destroyed. Total supply differs from Circulating Supply in that, the circulating supply does not count coins or tokens that are locked up and not yet in circulation. This is one of the reasons why the circulating supply value is approximated, as it's very difficult to accurately measure the number of coins at any one time that are in some form of escrow or lockup. These dynamics are literally changing by the second.
Now that we have an understanding of what circulating supply, max supply and total supply are we can go back to the used VW Golf GTi example to see how these three aspects relate to each other.
Let's begin with the Max supply, So the used VW Golf we are using for the example is a 2010 model year and it is a GTi model. Let's assume that a total of 10,000 of these 2010 model Golf GTi cars were manufactured. This would be the total supply as no more 2010 year model cars can in fact be produced. Now let's look at the max supply. In this example, we would take the 10,000 2010 model Golf GTis produced and subtract the cars that have been written off and no longer exist, let's say that is 1500. This means that the total supply is 8,500. The total 10,000 produced, minus the 1,500 that are now dead. Now let's say, out of the 8,500 remaining cars out there 1,000 are stuck on a transport ship and temporarily unavailable but will soon be available for sale, then the circulating supply would be 7,500 on this given day.
This is of course a very crude example to demonstrate how it works and hopefully explains in a simple way how these three terms, circulating supply, max supply and total supply interrelate and how circulating supply fits into the picture. The final takeaway, circulating supply is the total number of coins or tokens actually in the hands of the public and potentially available to buy and sell at any given moment.
ELI5 Circulating Supply
Circulating supply is the best way to know how many coins or tokens are currently in circulation - being active in the crypto market.