The value of cryptocurrencies ultimately rests on the traditional economic principles of supply and demand. Demand factors are largely opaque as it is quite difficult to distinguish between speculative demand (i.e. market trading volume) and actual use (blockchain transaction volume). Supply however, is more easily quantifiable. The set token supply schedule (or “monetary policy” for economists) is determined by the development team, and token distribution rates are often disclosed within their respective whitepapers. A maximum supply of the token is established - generally between 100 Million and 1 Billion units - as well as the amount allocated to the public and founding team during the ICO.
Scrutinizing the team’s allocation is highly critical in determining the token supply dilution rate, or how inflated the supply will potentially become, which consequently depresses price. The amount withheld by the founding team (usually between 10-20% of Total Supply) may or may not be subject to vesting periods and “cliffs”, which dilute the supply at a fixed rate. If there is no vesting period listed, the supply dilution rate is highly variable and thus may fluctuate dangerously should the founding team sell a large amount of tokens, thereby vastly increasing the supply at random.
Additionally, cryptocurrency data sources such as Coinmarketcap.com will list “Circulating Supply”, “Total Supply”, and “Maximum Supply.” Circulating Supply accounts for the amount of tokens released to the public during the ICO, whereas Total Supply equals the Circulating Supply plus the amount withheld by the founding team. Maximum Supply is the ultimate number of tokens that can be created (or “mined”) and is pre-set through fixed emission rates governed by the token’s blockchain protocol.
At Digital Asset Research, we make it a top priority to discretely analyze the supply schedules of all cryptocurrencies to accurately verify their effects on each token’s value.