The price of a cryptocurrency is determined by a combination of factors including its circulating supply. The price/supply ratio analyzes the relationship between a coin’s price per unit and its total supply in circulation.
Evaluating this ratio relative to other cryptocurrencies can provide insights for investors to identify potential opportunities. This article will examine how the price/supply ratio is calculated, what it indicates about a cryptocurrency, and strategies for using it in analysis.
Calculating Price/Supply Ratio
The price/supply ratio is calculated by dividing the current market price per coin by the circulating supply.
For example, if Coin X is trading at $2 and has 10,000 coins in circulation, the calculation is:
Price/Supply Ratio = $2 / 10,000 coins = $0.0002.
The ratio measures how much each unit of supply is currently valued in the market relative to the total. A higher ratio indicates the market values each coin highly compared to the available quantity.
Assessing Ratio Relative to Market Capitalization
Price/supply ratio is closely related to but distinct from market capitalization (market cap), which equals price multiplied by supply. Cryptocurrencies with equal market caps can have vastly different ratios depending on supply structure.
For example, Coin A and Coin B both have a market cap of $1 million. But Coin A has a supply of 1 million at $1 per coin, while Coin B has a supply of 10 million at $0.10 per coin. Coin A would have a significantly higher price/supply ratio.
Indications of a High Price/Supply Ratio
A relatively high price/supply ratio often signals strengths about a cryptocurrency:
- Increasing scarcity — Declining circulation makes remaining coins more valuable.
- High demand — Buyers are bidding up the price due to positive sentiment.
- Strong utility — Coins unlock valuable features, driving adoption and demand.
- Speculation — Investors believe price will increase in the future based on developments.
A high ratio essentially reflects the market’s willingness to pay more for each available unit of the cryptocurrency.
Evaluating Ratio to Identify Potential Opportunities
Analyzing the price/supply ratio of various cryptocurrencies can help identify three types of potential opportunities:
Coins with a relatively low ratio compared to competitors may be underpriced given their utility and other fundamentals.
Coins with declining circulating supply due to burning or locked staking may see increasing ratios.
High ratios can signal speculation upside for investors who time entries and exits correctly.
Combining ratio analysis with other metrics helps build a more complete picture to uncover promising investment candidates.
Considerations and Limitations
A few important caveats to keep in mind when evaluating price/supply ratios:
- Ratios can change rapidly with price volatility in either direction.
- Max supply factors like inflation rates influence ratio over the long-term.
- Differences in utility and tokenomics across currencies make comparisons imperfect.
- Extremely high ratios may indicate overvaluation and bubble risk.
Like all metrics, price/supply ratio should not be analyzed in isolation but rather as part of a holistic analysis.
The price/supply ratio distills the relationship between a cryptocurrency’s valuation and scarcity into a single metric. Analyzing ratios across coins provides perspective for identifying underpriced assets, emerging scarcities, and speculative opportunities.
However, ratios must be assessed in combination with other factors to build a complete investment thesis. As a straightforward indicator of demand versus availability, price/supply ratio is a valuable tool for crypto investors seeking assets poised for appreciation.