Understanding cryptocurrencies with limited supply

In Trading Strategies

The Bitcoin supply is limited to 21 million. In other words, it is deflationary by nature.  As a result, not more than 21 million Bitcoins can ever be mined or be in circulation at any given moment. 

Other tokens, like Ethereum, have a constant flow of new assets added to the ecosystem, which makes them inflationary.

Most cryptocurrencies follow a demand and supply principle that determines their growth.

So, the question arises: Why are people investing in cryptocurrencies with a fixed/limited supply? 

Understanding what ‘supply’ means

The supply of a particular cryptocurrency refers to the total number of coins in circulation. Three essential terms relate to supply:

- Fixed supply

Fixed (or maximum) supply is the total number of coins that can ever be in circulation.

- Total Supply

Total supply is the number of coins currently mined (including the missing ones that are no longer in circulation or lost).

- Circulating supply

Circulation supply refers to the total number of coins in circulation.

Relationship between the current value and circulating supply

There is a strong relationship between the current value and the circulating supply of a cryptocurrency. 

Bitcoin is by far the world’s largest cryptocurrency by market cap, with a fixed maximum supply of 21 million.

The reward for mining Bitcoin is reduced by 50 percent every four years. Bitcoin Halving is known as the event where new Bitcoins entering circulation as block rewards are cut in half. 

Banking on fixed supply: What it means to investors

Purchasing a cryptocurrency with a fixed/limited supply is an effective way to profit from the future value.

When dealing with a cryptocurrency with a finite supply, the price surge is almost always guaranteed.

Investors understand the importance of high demand and low supply. Despite them heavily investing in these assets, the overall supply does not always meet the rising demand.

Investing in cryptocurrencies with a fixed supply

Merely choosing a cryptocurrency with a fixed supply does not guarantee you profits. There are some additional factors you need to consider:

The cryptocurrency should have a rising demand.

Secondly, you should consider the time the cryptocurrency would exhaust the supply. Therefore, the coin you want to invest in should have a feasible halving cycle.

For example, Bitcoin halving is expected to continue until the year 2140.

It means the miners will receive some reward for mining until that time. Of course, the amount will be smaller than what they get now.

Until that point, the miners — who add new coins as block rewards — will control the price. By this logic, Bitcoin would carry an exceptionally high value by 2140.

Examples of cryptocurrencies with a fixed supply

- Bitcoin

Bitcoin (BTC) is the most popular cryptocurrency worldwide. In the past years, Bitcoin has been the go-to option for most investors, primarily due to a dramatic increase in its demand and value.

- Litecoin

Litecoin (LTC) is a cryptocurrency forked on the original Bitcoin project. It offers better transaction speeds and scalability and has a maximum supply of 84 million (approximately 75% of which is already in circulation).

- Cardano

Cardano (ADA) is a cryptocurrency that powers the peer-reviewed app platform. This crypto-asset, which goes by the ticker-symbol of ADA, has a maximum supply of 45 billion, which is one of the highest.

- Stellar

Stellar (XLM) is another cryptocurrency coin with limited supply. You can use it for payment settlement at the individual level and across the borders. It has a maximum supply limit of 50 billion and is valued at around $.40 per unit.

- Chainlink

Chainlink (LINK), an Ehtereum-based token, is another popular cryptocurrency with fixed/limited supply. You can use the currency for creating and running smart contracts, and it has a value of around $30 per unit. Chainlink (LINK) has a maximum supply limit of 1 billion.

Conclusion

It doesn’t mean cryptocurrencies with unlimited supply hold no value. For example, Ethereum has no fixed supply and is still the second-largest cryptocurrency by market cap.

The main idea is to understand if hard-capped cryptocurrencies have a greater chance of preserving their value over cryptocurrencies with an unlimited supply. The final decision should be based on thorough due diligence that involves more factors besides supply structure. 

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