A Gentle Introduction To Crypto Tokenomics
As cryptocurrencies have gotten more popular as investments, it has led to the discussion of “tokenomics,” a term used to describe the economics of crypto projects.
Some cryptocurrencies have tokenomics sections in their white papers or websites, but even for those that don’t, you can learn about them as you explore what a cryptocurrency does.
What is Crypto Tokenomics?
Crypto tokenomics, a combination of “token” and “economics,” is a term for all the factors that go into the value of a cryptocurrency. As you can imagine, this includes a wide variety of factors, including the maximum token supply, how new tokens are added to or removed from circulation, incentives for token holders, and the project’s utility.
Tokenomics is a simple way to refer to the overall economics of a specific crypto token. When you analyze tokenomics, you’re essentially looking at what gives value to crypto and whether it’s likely that the value rises or falls going forward.
What to Look at in Crypto Tokenomics
Purpose: what does the token achieve?
Functionality: how does it achieve it?
Utilization: is it actively being used?
Distribution: how is the token distributed?
Why Does Tokenomics Matters?
Understanding tokenomics can go a long way to helping you assess the merits of a given project. If crypto projects can successfully leverage tokenomics principles to grow a community, the tokens will have a good chance of success.
At a base level, tokenomics covers a cryptocurrency’s token metrics, like total supply and how tokens are distributed. For token projects, several different metrics impact crypto asset value. All of them fall under the tokenomics umbrella.
A firm grasp of token metrics is critical to long-term project success.
But tokenomics isn’t just applicable to token issuers — it’s also highly relevant to crypto traders.
Tokenomics metrics provide key indicators of success for a given project — crucial info for any trader.
Tokenomics explained
1. Total token supply
This metric represents the total number of tokens a token project can issue. For example, Bitcoin has a maximum supply of 21 million coins. Litecoin has a hard cap of 84 million coins, and BNB has a maximum supply of 200 million.
While not an ironclad indicator of project success, total token supply can give a general estimate of a team’s overall confidence in their project, but it’s also highly subjective and dependent on the business model.
Some projects may have a high total token supply, while the token supply of others may be more restricted.
This metric, in particular, is highly dependent on other tokenomics metrics.
2. Circulating supply
While total token supply indicates the total number of tokens that can be issued, circulating supply shows how many tokens have been issued to date and are currently available on the market.
From an investing perspective, it’s generally recommended to consider investing in projects with a large circulating supply only in the early days of a project’s launch.
This is because tokens often start priced at just cents on the dollar, meaning an increase to just a dollar in value can still be incredibly meaningful.
However, investors should look not just at circulating supply to make such a decision but instead index it alongside other key token metrics.
3. Token price
The token price is the amount in fiat (or BTC, ETH or another currency) required to purchase one token.
Identifying a token price that sets a project up for success is a key consideration for any crypto project, and put simply, this metric can be determined by taking the total allocation of tokens for a given sale and dividing it by the theoretical hard cap for the project.
4. Token Market cap
The market cap of a cryptocurrency is the price per token multiplied by the number of tokens in circulation (circulating supply, not total supply).
Compatibilities supported
Compatibility can be an indicator of the likelihood of success for some token projects, as it represents the degree to which a given platform is compatible with industry standards.
5. Fund allocation
Fund allocation refers to the number of funds distributed to the general public as part of a token sale.
In general, less than 80% of tokens being allocated for public use is a healthy indicator of success.
But be cautious of ICOs that have an abnormally low number of tokens available to the public, as those token sales may prove vulnerable to price manipulation.
6. Token inflation
This represents the amount of inflation that project owners have built into their projects.
Token inflation of any kind is generally negative for any investor, as it poses a high risk of token value dilution for retail investors in the long term.
Bottomline
Cryptocurrencies are high-risk, but some are much more likely to find long-term success than others. Tokenomics can help you pick out the potential winners and stay away from the ones that are all styles and have no substance.
Ultimately, the economics of a token will have a major impact on how it is used, how easy it will be to build up a network, and whether there will be much interest in the use case of the token.
