How To Use Circulating Supply To Calculate Price

Future price predictions can be calculated using

a simple financial formula and an understanding of how circulating supply can cap a coin’s future price growth. This brief guide will equip you with a powerful tool that can be easily applied to any cryptocurrency (and other assets).

The variables

For the sake of shorthand I’ve assigned letters to the variables:

price = p

market cap = mc

circulating supply = cs

The formula used to calculate p in financial markets is:

p = mc / cs

The price of an asset is the total amount of money invested in that asset minus the total amount in circulation. By altering either the mc or the cs, the price will be affected and will have to be “corrected” to make the equation correct. For example, let’s say XYZ token has a market cap of 1 million USD and 20 million tokens in circulation.

p = 1,000,000 / 20,000,000

p = .05

Each XYZ token is worth .05.

How altering the market cap influences price

Just to recap, p = mc / cs

Imagine XYZ tokens are becoming popular and an investor wants to buy in. The investor puts in a “buy” order to purchase 1,000 XYZ tokens at .10 per token for a grand total of $100. Since XYZ was purchased at a higher rate than the current price, new money was added to the market cap. For example XYZ token was:

.05 = 1,000,000 / 20,000,000

The new investor added an extra $50 to the market cap (he purchased 1000 tokens at .10 and the original price was .05. Take .10 – .05 = .05 and multiply that by 1000 we get = $50)

Now this “new money” is added to the market cap:

.05 = 1,000,050 / 20,000,000

Notice a problem? The equation is incorrect. So to make it valid, one of the variables has to change. Since XYZ does not mint any new token, the price needs to be corrected. This is a good news for holders because adding to the market cap increases price:

1,000,050 / 20,000,000 = .0500025

The new price of XYZ token is .0500025.

Removing money from the market cap has the opposite effect on price.

 

How this will help you predict future prices.

Now we will focus on the other side of our formula and examine how circulating supply affects the price potential. Using the first XYZ price example: .05 = 1,000,000 / 20,000,000  we will increase the circulating supply by 30 million:

.05 = 1,000,000 / 50,000,000

as you can see the formula is invalid and since nothing was added to the market cap, the price has to be corrected.

1,000,000 / 50,000,000 = .02

By adding to the circulating supply the price fell more than 50%. You can easily see how printed money creates inflation.

Money is limited.

Only so much money exists in the world, and only so much is in markets. Many people make the mistake of thinking any cryptocurrency has the potential to reach Bitcoin’s price, but as we see the price is dictated by the circulating supply and the total amount of money invested. Bitcoin’s circulating supply is currently ~17 million, while most coins coming out in ICO have a circulating supply in the billions.

 

A project coming out in an ICO with 10 billion tokens would require a vast market cap to reach Bitcoin’s price of (let’s use 7,000).

Remember: p = mc / cs

7,000 = mc / 10,000,000,000

To isolate and calculate the market cap we will use a bit of algebra and multiply each side by the cs

10,000,000,000 * 7000 = (mc / 10,000,000,000) * 10,000,000,000

10,000,000,000 * 7000 = mc

mc= 70,000,000,000,000

To summarize, it would take 70 trillion dollars for a token with 50 billion circulating in supply to reach a price of 7,000 USD.

Using this knowledge you can now easily examine how the amount in circulation limits price.

In 2017, the total amount of monies worldwide combined a total of 90.4 trillion and currently, there is only ~250 billion invested in cryptocurrencies. This is good news for those long terms investors, as over time new money should flow into the cryptocurrency market cap as they become more mainstream and accessible. This is bad news for investors who dump money into a half-baked ICO thinking its price will reach Ethereum’s price within a calendar year.

 

 

 

 

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