Circulating supply is the best estimate of how many coins or tokens are currently out there in the market—publicly available, held by investors, and actively tradable on exchanges. It functions similarly to the cash present in everyone’s wallets and pockets, ready for immediate spending or trading. It is not the total money that exists (as some of it might be locked away in company safes, vesting schedules, or yet to be created/mined).
Different cryptocurrencies have wildly different circulating supplies. For example, Bitcoin has roughly 20 million coins that can be traded today, but the total cap is 21 million. What accounts for the missing 1 million coins? They haven’t been mined yet.
The circulating supply plays a huge role in determining the price of a cryptocurrency. When there aren’t many coins available, and everyone wants them, the price shoots up. But when tons of coins are available, prices tend to drop. Therefore, before buying any cryptocurrency, taking a look at the circulating supply is important. A dollar coin with a billion units out there tells you something completely different than a dollar coin with only a million. A dollar-pegged stablecoin with a billion units circulating tells you something completely different than one with only a million: the former is far more liquid and widely distributed, while the latter might behave more like a scarce asset.
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It also plays a role in determining the market capitalization (price × circulating supply). That’s why market cap uses this number instead of the total or max supply: it reflects what’s actually influencing supply and demand in the open market right now.