Generic basis

Supply and Price

The relationship between supply and price can be easily illustrated by the basic economics supply and demand curve

As the token supply reduces from S to S1, the demand will reduce but the price will increase from P to P1. This is applied via coin burn, lock mechanism and buy back.

2. Inflation & deflation

The token supply is not a constant number, the number can constantly change. The currently circulating supply can increase by mining, staking or releasing founders (or investors) tokens. This creates inflation of the token.

Different crypto project has different inflationary mechanism, ie Binance coin (BNB) reduce their token supply via burning mechanism which reduces supply every quarter, which acts like a deflationary mechanism. Bitcoin has a sharp decline in their inflationary rate due to the halving the occurs once every 4 years. This allows the monitor of potential performance.

3. Token Supply & Inflation

Token supply provides crucial information on how many tokens have been or will be created and how many of them are circulating in the secondary market. However, the term "token supply" appears in different expressions when we try to examine the token supply of different cryptocurrencies:

Circulating supply: The number of tokens that are in circulation, most ICO project, team acquire a significant amount of token which are locked. Hence, this aren’t considered in the token supply.

Maximum Supply: It’s referred to the fixed number of tokens that has been or will be created. This is usually stated in their whitepaper.

Unlimited supply: This is for the tokens that consist of inflationary mechanism and does not have a fixed supply.

4. Token burn, lock up and Buy Back

Token burn: Is the process where a certain amount of token is sent to a burner address which result to a permanent reduction is supply of the token.

Lock Up: This temporary reduces the supply of the token, as this action is executed via a smart contract or a centralized exchange. This token can’t be sold or transferred till the maturity of the smart contract.

Buy Back: It’s when organization need to buy back when they do not have enough token in the reserve.

5. Price, Supply and Market Capitalization

$$MC=P×S$$

MC= market capitalization

P= Token units price

S= Token supply

Supply: The total number of tokens that is issued is determined via the organization through advance algorithm. Some token has a deflationary mechanism as tokens are destroyed or inflationary mechanism as tokens are created. These details vary in accordance to token supply of each individual project.

Price: It is and agreed price between the buyer and the seller in the market for exchange of tokens. Price fluctuates due to multiple variables, i.e., market activity.

Market Capitalization: Market capitalization is calculated simply by multiplying the price of a crypto asset by its supply. It is useful to compare, classify and analyze different tokens. It also represents the locked token value (in USD) for the given token. We can also use market capitalization to compare the size of the cryptocurrency market to other markets (like stocks or commodities) in terms of total capitalization.