The amount of a cryptocurrency that is in the hands of the general public. This is the number of coin or tokens that are available for trade. This does not include founder's stakes or team tokens (coins) locked up in a DAO or kept in a wallet.
Something like Bitcoin has a total existing supply that matches the circulating supply. For those that had ICOs or gave large chunks to the insiders it would look like this:
Circulating Supply = Total Supply - Founder's stake - Team tokens
Total Supply
The total supply of a cryptocurrency can also be considered the total amount that that could exist on a blockchain. This means the coins (or tokens) were created yet are not available to the general public.
In many instances, the distribution is through the ongoing inflation of the currency. More are released over time, increasing the circulating supply. Here we see how this can be affected.
Projects often set a high total supply yet only issue a fraction of the coins. This happens quite frequently with second layer applications. With a smart contract, that can be altered by the developers to change the supply.
Some distinguish between total and maximum supply. Under this interpretation, total supply is the amount that is available in total. Maximum supply is the amount that can ever be produced.
Token Burn
Both the total and circulating supply can be altered through burns. By sending the coins or tokens to an inaccessible wallet (such as null), they are removed from the supply.
Many feel that burns are a way to enhance the value. This is something market participants want to happen. The idea is that less units will mean a greater price on each.
This stems from the idea often used in the stock market. Stock buybacks are doing with the belief that removing outstanding shares will mean less going into the total value as established by the market.
Token burns are often used in lieu of development and expansion. Cryptocurrency projects are similar to any other business and should seek growth. A lack of growth cannot really be offset by adjusting the circulating supply, at least in the long term.
Market Capitalization
Market capitalization is different than circulating supply.
When looking at the total value, market capitalization is utilized. This incorporates the monetary component.
It is determined by a simple formula:
Market capitalization = circulating supply x price (per unit)
Market capitalization tells us what the market things of the cryptocurrency and allows for a rough comparison to others.
Bitcoin is the most valuable cryptocurrency by market capitalization.
More of Less Circulating Supply
What is the proper circulating supply to have?
There is no simple answer. Bitcoin has a limit of 21 million. Litecoin is much higher with Ethereum even greater.
Circulating supply can affect the per unit price which, in traditional markets, could affect the ability of certain investors in participating. This is why corporations will often do stock splits. When this happens, the number of shares is increased which brings down the post-split price.
For example, if a stock is $300 and the company does a 3:1 split, the amount of shares will triple with the price going to $100.
The total value does not change only the math regarding circulating supply and price.
This is less important with cryptocurrency since fractional purchasing is possible. Most brokerage firms does not allow fractions purchases of stock. With cryptocurrency, one can buy smaller units of the coin or token.
For example, Bitcoin is broken down into smaller units, called Satoshis. When buying on a exchange, either CEX or DEX, one can buy partial Bitcoin.
This means the circulating supply less of an issue since people can buy what they afford.
Stablecoins
All of this applies to value capture tokens. Stablecoins are in a different category although circulating supply is also applicable.
Since the price is relatively fixed (that is the idea of a peg), the market capitalization is basically the number of tokens issued. This is commonly pegged to the U.S. dollar so the market capitalization is simply the number of tokens circulating.
At the moment, Tether has the largest circulating supply in the stablecoin sector.