Understanding tokenomics is a must for anyone interested in investing in cryptocurrencies. It explains the distinction between 100x % ROI and a -90% portfolio.
Check out this guide to understanding tokenomics for a better crypto investment experience.
The Basics of Tokenomics
To find out more about tokenomics, you should consider specific indicators. Supposing you discover a potential token, these are the things to consider. They include:
- Circulating Supply
The quantity of tokens in the market that are accessible to the general public is the circulating supply. So, if 40 million tokens are available to the public, that’s the circulating supply.
- Total Supply
The total supply is the total number of tokens that will ever exist. Every token, including Bitcoin, has a total supply.
- Market Capitalization (MC)
The market capitalization is the total value of the circulating supply. So, to get the market cap, you’ll multiply the circulating supply by the current price, but it’s a lot easier now. You do not need to do heavy math; you can see it when analyzing a project.
- Fully Diluted Valuation (FDV)
The FDV is the total value of the total supply multiplied by the current price of the token. So, by multiplying the total supply by the current price of the token, you get the FDV. Knowing these metrics lets you determine whether a project will do well. But the thing is, knowing these metrics is one of many things you need to do. There is more to it than understanding these metrics; you must dig deeper. Let’s get right into it.
Supply Dynamics Inflationary vs. Deflationary Tokens
Tokens usually follow two main supply paths: inflationary or deflationary.
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- Inflationary Tokens
These are tokens whose supply can increase over time, known as emissions. It leads to decreased value since far too many tokens are in circulation. So, if the emission rate is slow and the total supply cap is far from the current emission rate, the negative impact on the value is not much.
- Deflationary Tokens
Deflationary tokens have a reduced supply. They shrink with time through token elimination processes such as token burning. Decreasing the supply will help to increase value as the number of total tokens is smaller, although it has only sometimes proven to work. Still, on tokenomics, let’s head over to the next aspect.
Allocation & Distribution
The allocation and distribution of a token determines its launch and life. In that regard, there are two primary distribution methods:
- Pre-Mined
Here, early investors, team members, and advisors get the tokens.
Fair launch
Anyone can buy the tokens during their launch. There is no preferential treatment when issuing them. You can buy the tokens at the fair launch, irrespective of your investment strategy.
If you understand how Pre-Mined allocation works, you can save yourself from being exit liquidity for early investors.
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Why Allocation Matters
If 50% of the tokens go to investors, who get 100% of their investments, they can dump them. All they have to do is sell off a large percentage, which will pull down the price of the coins. Key concepts to understand include:
- TGE Allocation: The tokens available at the Token Generation Event.
- Vesting: The gradual release of tokens over time.
- Cliff: The time between TGE and the next token vesting.
Common Distribution Recipients
- Private Sale: Such people are investors, key opinion leaders, and the like.
- Public Sale: Retail investors.
- Marketing: Various amounts of money for use in promotions.
- Ecosystem: It involves staking rewards and other incentives related to ‘ecosystem development.’
- Airdrops: Free distribution of tokens to promote the project.
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- Vesting Schedules
Projects release up to 20% of the token at TGE following several months of cliff. Afterward, you get 12+ months of vesting. Vesting schedules cater to long-term projects and reduce the chances of a token dump.
- Demand Dynamics
It also shows that you need more than supply to make a token successful. Demand is also essential. Here are four primary drivers of demand:
- Store of Value
Investors buy crypto assets with the expectation of their value increasing over time. That’s how people buy silver or gold, expecting it to do great numbers. People also see Bitcoin ($BTC) in this light because of its supply and global adoption.
- Community
A strong community can drive demand. Memecoins like Dogecoin got pumped because of their solid and enthusiastic communities. Community sentiment drives token demand. People go for tokens with active community participation.
- Utility
Tokens must offer some value proposition for people to continue to want them. For instance, tokens used in staking or voting have high demand since people need them to be a part of a network.
- Value Accrual
Tokens must also have utility through staking or even holding rewards. This value accrual encourages holding the token for the long term. It can also stabilize the token’s price level.
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Staking
Staking is depositing your tokens for a particular duration to receive rewards. It benefits the network by lowering the risk for the staker and ensuring consistent demand for the token.
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Holding Rewards
There is the locking up of tokens, which gives incentives to users. You can get airdrops from locking a token and help to maintain low selling pressure.
Advanced Holding Incentives
- VeTokens (Vote Escrow Tokens)
Tokens also create extra VeTokens accounts that grant the holder voting power. The longer you have the token, the more voting power you garner. Holders can receive incentives to work for the network to increase its longevity.
- Farm Boosting
Staking tokens can elevate the proportion of farming operations’ revenue. It also motivates holders to get and maintain more tokens.
- Evaluating Token Holders
Knowing token holders of a specific token is quite essential. A solid community can support a token, while oversized possessions mean dumps. Also, interacting with the project’s community will help identify holders’ activity.
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Conclusion
Tokenomics is the foundation of trading in any cryptocurrency investment plan. If one fails to study tokenomics, it is like taking on a game of chance. Exploring the supply and demand factors will assist you in your investment decisions. Even with the best tokens, there is no guarantee that some aspects will not impact the tokens. To reduce risks, adopt the latest information and perform thorough research.
Disclaimer
The information discussed by Altcoin Buzz is not financial advice. This is for educational, entertainment, and informational purposes only. Any information or strategies are thoughts and opinions relevant to the accepted levels of risk tolerance of the writer/reviewers and their risk tolerance may be different than yours. We are not responsible for any losses that you may incur as a result of any investments directly or indirectly related to the information provided. Bitcoin and other cryptocurrencies are high-risk investments so please do your due diligence. Copyright Altcoin Buzz Pte Ltd.