When trying to develop an understanding of the world of cryptocurrencies, you will come across various terms that are referred for calling out cryptocurrencies.
The terms used are often known as either a token, a coin and even an altcoin, which some believe can be referred to call cryptocurrencies, but the thing here to note is that all three of these terms have a totally different meaning to them. More on them in the coming sections of this guide.
Due to its nature of being very secure and practically transparent when it comes to activity, blockchain technology has transformed the financial space in ways that have never been sought out before.
Cryptocurrency transactions are also done through blockchains, which means that each and every transaction on it is recorded and stored permanently and can be viewed at any given moment.
While the topic of cryptocurrencies can go quite deep, this guide will be focusing on what crypto tokens are and how you can understand its supply and movement in the space. Initially this guide will discuss what crypto tokens are and then move towards supply.
Learning about the supply is very important as it can greatly provide knowledge and overview about the different aspects related to the crypto market, possibly giving you the advantages, you need to win in the space.
About Crypto Tokens
In basic terms, a crypto token is a form of digital asset that is developed over some other blockchain that is associated with another cryptocurrency.
Every record of movement of these transactions, mainly known as smart contracts are stored in a block that is located in the whole chain, hence the term, Blockchain. Since all cryptocurrencies are developed on their own separate blockchains, if a certain cryptocurrency is developed on a separate different chain, then it counts as a token.
Cryptocurrencies can be referred to as coins or tokens, but as said in the paragraph above, the difference between these two terms is based upon the nature of the cryptocurrency’s blockchain.
Same blockchain means that the cryptocurrency is a native to its own blockchain and the same coin founded on a different blockchain means that it is a token.
To gain a better understanding, we can take a look at the very popular Ethereum blockchain. Ethereum has its very own currency called Ether and because it was developed on the Ethereum blockchain, it is called as a coin.
The highlighted feature about the Ethereum blockchain is that it is known as the first ever blockchain that can be programmed over.
What this means is that it can be utilized to develop other cryptocurrencies with different names. Having the same blockchain, but with different identities, these types of cryptocurrencies are then called as tokens, formally named as ERC-20 tokens.
Bitcoin, which is considered to be one of the oldest cryptocurrencies did not posses this ability to create another cryptocurrency, so it is mostly known by many as a store of value and has become very stale in comparison, despite still retaining its top price valuation.
Because of Ethereum’s excellent use case, it is currently the most popular cryptocurrency blockchain and holds the second position in terms of overall market capitalization in the cryptocurrency market.
Tokens are considered to be trivial to develop, but there have been many underwhelming and lost projects that have took those tokens down with them. As concerning as it may sound, it is vital to understand that not every token is concerning, as there are many tokens in the market that have allowed traders to be successful.
Tokens give developers the power to come up with their own cryptocurrencies without having to develop a fully functional blockchain for it. Not only does this save time, but overall cost as well.
Some developers are hesitant towards developing their own blockchain because it is quite a challenging task.
Not only do they have to ensure the efficiency of the chain when processing transfers, but also have to maintain its security, which is the most vital aspect of them all, so that crypto transactions and assets do not become a target for hackers to exploit.
Usually, cryptocurrencies require validators to confirm transfers, however since blockchain like Ethereum have their own systems for handling them, it makes it much more feasible for developers to make tokens instead of coins of their own.
In comparison to tokens, cryptocurrency coins are digital currencies that are decentralized, utilizing the concepts of cryptography to process transfers having their information solidified in the blockchain.
Subsequently, an altcoin is any form of digital currency that is different from Bitcoin because they are known as surrogates of Bitcoin, which is the cryptocurrency that started it all.
Purpose of Crypto Tokens
Because tokens also carry a value, they can be used for exchanges, trading, buying and selling, as they are mainly present in wallets that are backed by a blockchain.
The exchanges of tokens are done according to the blockchain they originate from, meaning that if the token is Ethereum-based then it is up to the Ethereum blockchain to process the activity. There are also some other purposes of using tokens.
A token can be used for governance, making it a governance token. This governance token provides its owner the rights to vote for changes associated with a specific crypto project.
Not only can owners of governance tokens vote but can also create votes of their own to assist in keeping projects stable and expansive. The higher the amount of governance tokens someone has, the higher the voting influence they have over the vote.
Another use of tokens comes in Decentralized Finance (DeFi) that are basically financial systems developed and powered by blockchain technology. DeFi platforms can provide services like loaning in which the tokens are presented as collateral, with each of these platforms have developed their personal native token.
Furthermore, investors looking to loan out crypto become eligible for bonuses which mostly consist of more crypto tokens.
Additionally, a crypto token can also be in the form of a non-fungible token (NFT). NFTs are basically assets that contain data about its owner, which means the asset has a single owner, thus giving it valuation.
NFTs can consist of digital media like images, videos, animated logos, in-game items, music files, collectible items and others. NFTs can be traded through trading platforms. Popular platforms include OpenSea, Rarible, SuperRare, Nifty and others.
Basics of Crypto Token Supply
Crypto token supply, described in basic terms refers to the amount of cryptocurrencies that have been developed and their activity around the crypto market. There are three terms associated with crypto token supply that need to be understood in detail which include the circulation, the maximum and the total supply.
The next portion of this section will describe these three terms in basic words however, they will be further discussed in the next section of this guide in great detail.
Total supply is the sum of adding up the supply that is in motion and the amount of coins which have been stored inside of smart contracts.
In a smart contract, a number of assets are put behind bars unless the condition or an agreement set in the contract has been fully completed. The maximum supply is the highest amount of tokens or coins that are able to be generated.
All the three terms are very important because they are used to calculate other complex aspects like token spread, token need in the market and the overall market capitalization.
The supply numbers also have an effect on the price valuation of a cryptocurrency, making supply one of the key factors that are required to analyze the performance of a certain project.
Looking at traditional money like dollars, they can be easily generated again through authorization from the respective country’s central bank, but in the case of cryptocurrencies, there is only a limited supply that is considered during development, making the supply hard to change.
What can change is the level of supply, meaning that the supply can be spread across in a single go, however the majority of cryptocurrencies are obtained through the process of mining or minting.
Taking the example of the Bitcoin cryptocurrency, it boasts a limited supply of 21million. In comparison to Bitcoin, Ethereum supply is not capped, however its supply rate was limited to about 1600 Ether for each day, ever since the merging event took place.
This term associates with the amount of tokens or coins that are currently moving around the market at a selected time frame, and which are ready for trading.
Circulating supply is utilized to determine the market capitalization and the economic levels of a cryptocurrency in the crypto space. The market capitalization is a mathematical calculation that is done by multiplying the coin’s current price valuation with the total amount of coins that are present in the blockchain.
Remember that the total amount of coins considered in the calculation also includes the coins that are lost or are disposed of, because every single coin counts here.
Another sub-term related to market capitalization, known as realized market capitalization can also be determined, however the main difference between the two is that the realized market capitalization is found by using a coin’s last known activity and the coins that are lost or disposed are not counted.
As mentioned previously, Bitcoin has a limited supply and a rise in its movement is only possible through the process of mining, but the people working behind tokens that are more centralized nature are able to develop a rise in movement by the process of instantaneous mining, which is similar to what traditional banks do.
The factor that causes circulation supply to reduce is the called Burning. Burning involves eliminating the coins by transferring the coins to private wallets which have no information about their security keys known. Because of this, Circulation supply should be known as an approximation.
The maximum supply is the complete amount of tokens that will ever be generated. This factor is considered and set during the creation of the genesis block.
Taking the example of Bitcoin’s fixed supply into consideration yet again, despite the possibilities being endless, Bitcoin’s solid code base does not allow any more Bitcoin to be generated more than the 21million mark.
Looking at another type of coin called Stablecoin, which is a coin that is pegged to a reserve asset like the dollar, it maintains the maximum supply value to a consistent value so that in the case of a supply shock, there is practically no effect or change on the price valuation of the asset.
Stablecoins manage this level of stability in supply either through collateral reserve assets or programs that help to maintain supply by burning accordingly.
Similar to stablecoins, there are also coins that are powered by mathematical algorithms, which help them to keep a consistent price valuation, however they are susceptible to some issues such as de-pegging.
The best example for this is Tether which suffered from de-pegging which occurred in the mid of 2022, proving that even the most stable of coins can suffer from glaring issues that can harm investors.
The maximum supply can have the most impact on the price valuation of an asset because if the maximum supply is achieved then there aren’t any coins left to generate, then it leads to issues like scarcity in which the asset becomes rarer, increasing the price valuation further if the demand is high and miners having to depend on charges for rewards.
Another trait with Bitcoin is that its maximum supply is adjusted accordingly using the method of halving, so that the maximum value is completed by the year 2140. This halving method is conducted after almost every four years, thus deeming Bitcoin to be known as deflationary.
The total supply is another mathematical calculation that is done by summing up the circulating supply and the amount of coins that are mined and have not been spread in the market. Please note that any tokens or coins that are burned are not to be included as they are practically inaccessible.
This mostly applies to factors like staking and smart contracts in which coins stay put until the agreement or condition has been satisfied.
This also happens during the introduction of a fresh cryptocurrency, in which the amount of tokens being provided do not match the amounts that are being spread across the market.
This technique is mostly done to avoid oversupply and keep the level of demand balanced accordingly, because oversupply can hurt the price valuation.
Additionally, the introduction of a fresh blockchain also allows developers to utilize those early generated tokens as development funds before spreading them across the market.
This token supply value can be risen, but the protocol regulations must be considered before doing so. Looking at Bitcoin, the maximum supply cannot be tangled with unless a full consensus happens to bring a change.
Through tokens, developers can transpose supply regulations through strategic planning in advance by altering smart contracts.
The Superior Type
It is fairly challenging to determine the best. Both the circulating supply and maximum supply might have their separate use cases, however learning about them is equally vital to the total supply, which can assist in figuring out their effects on the asset’s price valuation.
Each of the three supply factors provide a different perspective over an asset’s performance in the market, so all of them have to be considered when making big moves.
A price valuation trend for the coming time is something that is extremely important for ant investor who is looking to apply strategic methods and prepare in advance to maintain their earnings.
Each of the three terms discussed can be utilized effectively and while the total supply and circulating supply can vary as time passes, they are important to keep in touch with a project and its future plans.
Both coins and tokens are often known as parallels to public traded shares that are present inside of stock markets, mainly because of their price valuation having an effect on the supply and need situation.
To maintain a rise in the price valuation with an increase in coins requires a rise in demand subsequently. If the supply is minimal and the demand is more, then there will be rise in price valuation and if there is minimal demand and the supply is excellent, then the pricing will fall.
In conclusion, hopefully this guide has provided a clear view over tokens and how their different types of supply factors are analyzed. The three supply factors can be confusing at times, but once you get the hang of it, it is not that difficult.
Learning about pricing trends can be extremely beneficial for both investors and project officials to gain a better idea of where a token’s price valuation and market capitalization stands, thereby assisting them in making advance moves for the coming time.