Understanding cryptocurrency supply and why it’s limited

By Trey Huynh October 2 2024

Recently, in a tweet, Michael Saylor predicted 99% of Bitcoin would be mined by the year 2035. Now, the MicroStrategy co-founder is known to make some wild statements about crypto, but this one really shines a light on the scope of cryptocurrency supply, Bitcoin, in particular, and why scarcity can create value.

We’re all vaguely aware of how a cryptocurrency needs to be mined and how there’s only so many of them to acquire. The reality isn’t much more complicated than that, albeit more nuanced. Many cryptocurrencies are designed with limited supply as scarcity will have a major impact on their value over time.

What is cryptocurrency supply?

Cryptocurrency supply refers to the total amount of coins or tokens that exist for a specific digital asset. There are three key terms to understand:

• Circulating supply: the amount of coins available in the market for users to acquire, trade and sell.

• Total supply: the total amount of coins in existence, including those not in circulation.

• Maximum supply: the hard cap limit on how many coins will ever exist.

For example, Bitcoin has a total of 21 million coins of maximum supply. This means you can never find more than that in circulation. This cap is written in Bitcoin’s code, ensuring that once all of them have been mined, no new coin would be created. The same principle applies to any cryptocurrency with a hard cap.

The coding behind cryptocurrency supply: ensuring the hard cap

All crypto coins are powered by blockchain technology, and the rules that govern them are written directly in their codes. This includes the maximum cap, and there are a few moving parts within it.

Smart contracts and supply limits

Smart contracts are known to facilitate transactions on the blockchain, but they’re also used to define a cryptocurrency’s supply limits. In the case of Bitcoin, the maximum supply of 21 million is hardcoded into its protocol. This code includes instructions on how Bitcoins are mined and reward conditions for validators. Once the limit is reached, the protocol is designed to stop generating new coins.

Mining difficulty adjustments

Blockchains like Bitcoin have mining difficulties adjustments in place to control the rate of blocks being mined. This is to keep the population of validators high while maintaining the longevity of the crypto. As we’re getting closer to reaching Bitcoin’s maximum supply, it’s becoming increasingly difficult to mine.

In the early days of Bitcon, any one person with a decent computer could mine a Bitcoin in a couple weeks. Nowadays, even with the most advanced hardware, it would take nearly a decade for an individual to mine one Bitcoin.

The only feasible way to mine Bitcoin today is collectively from mining rigs, but those are often more costly than the results they produce. As we get closer to the last few thousand Bitcoins, the amount of energy and time it would take to mine a single coin would be unthinkable. 

Why does cryptocurrency have a limited supply?

The short answer is, scarcity creates demand, and demand drives value. This fundamental economic principle applies to cryptocurrency just as much as anything else. Crypto with a fixed supply will become more valuable as demand rises and the available coins become fewer.

Having a limited supply also prevents inflation. If too many coins enter circulation, its value will eventually decrease and miners would lose interest over time. Bitcoin is sometimes referred to as ‘digital gold’ - its hard cap mimics the scarcity of precious metals.

A predetermined maximum supply of a coin can also increase trust and stability. Investors know the rules won’t change arbitrarily and there is no central authority that can manipulate it by minting more coins.

Cryptocurrency limited supply vs infinite supply

Not all cryptocurrencies have a fixed supply. Some crypto, like Ethereum, can keep getting minted forever. They follow an inflationary model, and there’s pros and cons to both this model and having a fixed supply (deflationary model.)

Having a limited supply can help bolster the value of a cryptocurrency, but when that supply runs out, validators would need to find new ways of earnings now that mining is no longer an option.

Coins with an infinite supply always face the danger of inflation and decrease in value, but in return have no problem maintaining liquidity and attracting validators to contribute to the network. This is similar to traditional fiats, where governments can print more indefinitely but with the risk of losing the national currency value.

Why limited crypto supply matters to investors

Many investors are drawn to cryptocurrencies with limited supply for its potential to grow. As demand increases and supply stays fixed, the asset may appreciate, making an attractive long-term investment.

However, it’s important to be cautious about artificial scarcity. You may have come across or heard about ‘limited edition’ tokens that often turns out to be just a hype project. These are usually scams, and even if not, they constantly struggle with price bubbles and are not very sustainable.

In summary, cryptocurrencies, either limited or infinite, play a crucial role in the trading and owning of digital assets. Understanding a crypto’s supply can help you gauge the future value of your portfolio and make better investment decisions.

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