INFLATION RATES
06.01.2021
INCREASES IN CIRCULATING SUPPLY OF TOP COINS
Introduction
The circulating supply is a crucial factor in the price determination of a cryptocurrency. Once yet undistributed coins are moved into the circulating supply, they become tradeable and can be sold on the market. With some projects running low on funds, moving coins from the total supply into circulation and then selling them is an adequate method for these projects to gain more funding. Unfortunately, this can drive the price of a coin down, because the small demand doesn’t match the massive amount of coins being sold and the project might sell the coins at any price available. To my surprise, circulating supply increases are way less forecasted than prices, even though they can influence the price heavily. Therefore, I will take a closer look at the top coins’ circulating supply per year in this article.
Supply Inflation: Bitcoin
Let’s start with the biggest cryptocurrency. Bitcoin has been around for over 11 years now and shows, how the circulating supply inflation rate can decrease gradually over time. Starting with a very high inflation of 208% at the end of 2010 compared to the end of 2009, Bitcoin’s circulating supply inflation has decreased significantly over time. It went from a triple-digit percentage increase in 2010 to a double-digit percentage increase in 2011 and then down to a single-digit percentage increase in 2015. Famously, Bitcoin’s inflation decreases over time due to halvings, that occur every 210,000 blocks and decrease the block rewards. Previous block reward halvings have occurred in 2012, 2016 and 2020 and have reduced block rewards from 50 BTC to 25, 12.5 and currently 6.25 BTC. The following graphic shows the inflation rate of Bitcoin’s circulating supply per year:
Supply Inflation: Ethereum
Ether’s supply inflation is different to Bitcoin’s due to a certain amount of pre-mined tokens, that were sold in Ethereum’s ICO. I estimated, that 63 million ETH were sold in their ICO back in 2014 and declared the difference to the ETH in circulation at the end of 2015 as supply inflation for ETH in 2015, which is around 21%. Similar to Bitcoin though, the inflation rate decreased per year and has been in the single-digit percentage region since 2018. Key influences to Ethereum’s supply inflation were two block reward reductions. The first one reduced the block reward from 5 ETH per block to 3 ETH per block in the Byzantium hard fork in late 2017, while the second one took place in 2019 and reduced the block reward from 3 ETH to 2 ETH in the Constantinople hard fork. The following graphic shows how Ether’s circulating supply inflation rate developed over time:
Supply Inflation: TOP 20
Bitcoin’s and Ethereum’s circulating supply inflation look healthy and organic. The longer both networks have been live, the lower is the inflation rate of their circulating supply. Let’s take that as a reference and look at the circulating supply inflation of other coins and tokens. I made a snapshot of CoinMarketCap top 20 at the end of 2020 and analyzed their inflation rate per year. The circulating supply per coin at year-end is taken from CoinMarketCap’s historical snapshots. 2 coins/tokens were excluded from that analysis, because they didn’t have market cap data in at least 3 different years (WBTC and DOT). The resulting graphic displays the inflation rate per year for 16 coins/tokens (Bitcoin and Ethereum have already been displayed in the sections above):
As the data shows, inflation rates are highly different across these 16 coins and tokens. Some of them have very small inflation rates (Bitcoin Cash, Bitcoin SV), while some of them even have zero inflation into their circulating supply (NEM). Others started with a very high inflation rate (Litecoin, Monero) but it then decreased over time. As stable coins, Tether and USDC are outliers in this dataset, since an increase of their circulating supply theoretically means that more tokens backed by fiat money are entering the crypto space (whether that might be true or not shall be the subject of other articles).
Furthermore, attracting investors with an inflation rate of zero is not the only incentive of declaring all coins in the total supply as circulating supply. The market cap of a project is calculated by its circulating supply times its current price. If a project declares, that all their coins are in circulation even though 50% of them haven’t been distributed originally, their market cap is 2x higher than it would be, if they will define their circulating supply correctly. Since the most common ranking method for cryptocurrencies is by market cap, a project can boost its placement in these rankings with this method.
Adding to that, I think it also important to distinguish between a planned inflation and a rather unplanned inflation. If a coin is mined for example, its mining rewards might be already determined for the next few years or even decades to come. Both the miners and the investors know, how many coins will be released at which point in time and can act accordingly. When it comes to pre-mined tokens though, it can be hard to determine, when these tokens will be put into the circulating supply, especially if the vesting period is not scheduled via a smart contract. Events like a wallet getting hacked or a project running out of funds can lead to a massive dumping of these tokens on the market, which nobody could predict before.
However, a high inflation doesn’t matter so much, if there is a high demand. Bitcoin had a very high inflation rate of 208% in 2010 and 59% in 2011, but managed to go up from being basically worthless to 30 US Dollars in mid-2011. As another example, the price of Zcash increased by almost 10x in 2017, even though the circulating supply increased by 765% in the same year. It has to be stated though, that most cryptocurrencies don’t have a very high demand and are just speculation objects, which leads to prices massively decreasing if a bigger amount of yet undistributed coins and tokens hits the market.
Discussing supply inflation in general
The circulating supply displayed for each coin/token is mostly defined by the projects themselves. Let’s say a project defines, that their total supply equals their circulating supply and therefore all coins have been distributed and are in circulation. It means, that there is no inflation currently and there will be no inflation in the future – a good sign for investors. However, it is tough to determine, whether or not a certain amount of the circulating supply has been held by the team from the start and is more or less not distributed and therefore shouldn’t count as part of the circulating supply.
Furthermore, attracting investors with an inflation rate of zero is not the only incentive of declaring all coins in the total supply as circulating supply. The market cap of a project is calculated by its circulating supply times its current price. If a project declares, that all their coins are in circulation even though 50% of them haven’t been distributed originally, their market cap is 2x higher than it would be, if they will define their circulating supply correctly. Since the most common ranking method for cryptocurrencies is by market cap, a project can boost its placement in these rankings with this method.
Adding to that, I think it also important to distinguish between a planned inflation and a rather unplanned inflation. If a coin is mined for example, its mining rewards might be already determined for the next few years or even decades to come. Both the miners and the investors know, how many coins will be released at which point in time and can act accordingly. When it comes to pre-mined tokens though, it can be hard to determine, when these tokens will be put into the circulating supply, especially if the vesting period is not scheduled via a smart contract. Events like a wallet getting hacked or a project running out of funds can lead to a massive dumping of these tokens on the market, which nobody could predict before.
However, a high inflation doesn’t matter so much, if there is a high demand. Bitcoin had a very high inflation rate of 208% in 2010 and 59% in 2011, but managed to go up from being basically worthless to 30 US Dollars in mid-2011. As another example, the price of Zcash increased by almost 10x in 2017, even though the circulating supply increased by 765% in the same year. It has to be stated though, that most cryptocurrencies don’t have a very high demand and are just speculation objects, which leads to prices massively decreasing if a bigger amount of yet undistributed coins and tokens hits the market.
Wrap-up
Inflation of the circulating supply is a factor, that can have a fundamental influence to the price, even though it is not often considered in price analyses. Bitcoin’s and Ethereum’s increases in circulating supply have been decreasing over time percentage-wise. Other coins have had various inflation rates, ranging from zero inflation to a very high inflation above 25%. Due to the circulating supply being determined mostly by the projects themselves, it can be also used to manipulate investors’ expectations and the project’s rating in rankings by market cap. This article showed, how different the increases in circulating supply are across all coins and tokens in CoinMarketCap’s top 20.
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