What Is Tokenomics In Crypto?

What Is Tokenomics In Crypto?

If you want to make a profitable investment as a crypto trader, you will search for crypto coins that have the potential to hit 10x, 100x, and so on.

One way to do this is to check the tokenomics of a coin or token you have in mind. Though this is not the only way to spot a good crypto investment, it goes a long way to help you decide.

This article is for you if you seek a coin to invest in. We will explain tokenomics and its various aspects and some other tips you should know.

What is Tokenomics?

Tokenomics is the study of the economics of token/coin. Here, we study how a coin is in supply, demand, distribution, values, and use cases. It is also the study of all the economic factors that make a coin worth investing in or not. 

It comes in various aspects, but we will categorize it into two

  • Supply-side tokenomics
  • Demand-side tokenomics

Supply-side Tokenomics

Supply-side tokenomics focuses on maximum and circulating supply, which are factors that control a cryptocurrency supply. Bitcoin will only have a maximum supply of 21 million, making it the hardest money ever created. Its circulating supply is the amount of coins circulating in open markets and is readily tradable.

Aspects of Supply-side Tokenomics

  1. Inflation

Inflation can complicate the concept of tokenomics, as some projects have constant token inflation, where the supply goes up forever as the network creates more coins to reward miners or validators. While we generally prefer not to have inflation, there are still some inflationary coins that perform well. To ensure a stable token economy, it is better to avoid inflation that is too high.

  • Tip: Inflation should be fair due to its impact on the demand for coins. 
  • Take its yearly inflation percentage and convert it to a daily dollar amount. If the daily inflation rate is too high, it could be a red flag. Short-term speculation can overcome high inflation rates, but long-term investments are impossible.
  1. Deflation

Deflationary tokenomics, such as Ethereum, remove tokens from circulation through token burns. For example, for every transaction sent to the network, part of the gas fee is burned or removed, potentially leading to a net deflationary state. This may explain why Ethereum has held up better than its competitors during the past bear market.

  • Tip: To find 100x gems, focus on projects with deflationary tokenomics or a maximum supply. 
  1. Market capitalisation

Market cap is the total value of all the coins supplied. It is calculated as (Circulating supply X Price). For coins with 10x or 100x potential, go for projects with lower market caps, but the risk with such projects is high.

  1. Unit Bias

Unit bias is a psychological phenomenon; it matters when you are evaluating the price of a token. Though the price of a token doesn’t necessarily reflect its performance or potential for growth, the price of a token does matter due to unit bias. 

For instance, an investor will prefer to have 200,000 doge coins than 0.26 bitcoin, even if the total value of their investment remains the same. Understanding unit bias can help you make more informed investment decisions.

  1. Fully diluted valuation (FDV)

Fully diluted valuation is equal to (Max Supply X Price). FDV is the final price of a coin after its maximum supply has been reached. A project’s FDV should never be higher than its market cap. 

This is important because sometimes a project’s team may release a small percentage of their tokens into circulation, making their market cap seem reasonable, but their fully diluted value is massive. Such a project will never be able to grow to its full potential.

  1. Trading Volume

Trading volume is the amount of tokens or coins traded within a specific period (e.g., 24 hours, a week, or a month). It is an important metric to analyze alongside market cap, as it can tell us whether a project’s market cap is reliable. For example, if a market cap of $500M and $50M daily trading volume is healthy because it shows a strong, active market with reliable price discovery. But if a coin with a 1 billion circulating supply sells for one dollar, the market cap would be 1 billion dollars for one sale, and it’s shady. To ensure the reliability of the market cap number, it is crucial to look for a high volume-to-market cap ratio.

  1. Initial Distribution

This is how the tokens are shared at the launch of the project. Tokens should be widely distributed, with more allocated to the community and less to founders or venture capitalists (VCs) to prevent market manipulation.

  1. Fair Launch

Fair launch means that no party should have more tokens than the other. In an ideal scenario, all tokens are distributed to users with no reserved allocations for the team (e.g., Yearn Finance’s YFI token). However, fair launches aren’t always practical for every project.

  1. Vesting Schedule

Vesting schedules are set timeframes on how tokens for stakeholders in a project get released. This determines when team and investor tokens are unlocked. If tokens are released too often (Aggressive vesting schedules), it can lead to heavy selling pressure, which may fall the token’s price.

  1. Current Distribution

Current distribution refers to how a token’s supply is currently spread among holders from changes due to trading, staking, and vesting unlocks. A well-distributed token with many unique holders is preferred, as it reduces the risk of price manipulation by large investors.

Demand-side Tokenomics

The demand-side tokenomics is the final piece to complete the puzzle of a well-done tokenomics review, as the supply-side is not enough in itself. Strong demand is required for price growth.

  1. Token Utility

The most important driver of demand. A token should have a real use case, such as paying for gas fees, hedging inflation, accessing protocols, or staking. Governance tokens are often ineffective since most holders don’t participate in voting.

  1. Financial Incentives

Staking rewards and revenue-sharing models can encourage long-term holding. Sustainable incentives, like GMX’s model of sharing protocol fees with stakers, reduce selling pressure.

  1. Growth & Marketing Allocation

A portion of the token supply allocated for marketing, community rewards, and airdrops helps attract users and increase demand. Airdrops, in particular, are effective for driving early adoption.

Tools for Tokenomics

These are some tools used to study a coin’s tokenomics

  • CoinMarketCap: CoinMarketCap is used for checking maximum supply, circulating supply, and other basic token information.
  • CoinGecko: Similar to CoinMarketCap, it provides data on cryptocurrencies. You can use this to find initial distribution charts.
  • Etherscan: A blockchain tool for exploring the Ethereum network. This is for analyzing token holders, distribution, and other on-chain data for ERC-20 tokens.
  • Token Unlock: A great tool for tokenomics research to find out when locked tokens will be released into the market.

Tips for Tokenomics

  • Check Maximum and Circulating Supply: Long-term value of coins with limited max supply.
  • Analyze Inflation and Deflation Models: Favor deflationary tokens or those with controlled inflation.
  • Look at Market Capitalization: Low market caps offer high growth potential but come with more risk.
  • Evaluate Trading Volume: A high volume-to-market-cap ratio signals a healthy market.
  • Understand Fully Diluted Valuation (FDV): Massive FDV compared to the market cap may indicate a future price drop.
  • Assess Initial Token Distribution: Tokens should be widely distributed.
  • Review Vesting Schedules: Gradual vesting prevents sudden sell-offs and price crashes.
  • Analyze Current Distribution: Use tools like Etherscan to check tokens’ widespread holding.
  • Check Token Utility: Strong use cases like gas fees, staking, or protocol access drive demand.

Conclusion

When you are considering a crypto investment, tokenomics will be helpful to help you make correct investment decisions. Look at how the coins are distributed as well as the reserves and how the supply and demand dynamics are working. To do your research, you will have to use certain advanced tools such as CoinGecko, Binance, and Etherscan. A good tokenomics model must have risk management and thus it should be able to generate profits in the long run for the investors. Remember to always do your own research as nothing you see or hear is financial advice.

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