In this article, we discuss the concepts related to tokenomics and provide information on the key elements that should be considered when investing in a crypto token.
Tokenomics is a term coined by combining “token” and “economics,” referring to the economic characteristics of a cryptocurrency token. A token is a type of digital coin that operates on a blockchain platform and can be exchanged with other cryptocurrencies. The concept of tokenomics encompasses all of the token’s features and qualities that make it appealing to investors.
To gain a better understanding of a particular token’s characteristics, investors should review the tokenomics section in the project’s whitepaper. This section should provide a detailed explanation of the token’s purpose, functionality, allocation policies, and other relevant information.
When considering an investment in a token, particularly in the early stages of a project, it’s essential to examine the tokenomics from the project backer’s perspective. In this context, four key elements should be taken into account.
Allocation and Distribution
As an investor, you will need to understand just exactly the token being distributed. The two most common ways in which tokens are generated are by either being released via fair launch or being pre-mined.
Pre-mining happens when a predetermined number of tokens are generated and distributed before going public.
They usually tend to go to project developers, team members, early investors, and so forth, meaning only strictly exclusive addresses get them at first.
Opposite to a pre-mining event is what is known as a fair launch. A fair launch happens when crypto is mined, owned, earned, and also governed by its community without having early access granted to any particular party or private allocations happening before going public.
Pre-mining is tendentially more popular amongst most crypto projects, which means that before investing, one should see if there happens to be any wallets hoarding a significant number of tokens which might greatly impact the token’s price if dumped into the market.
On the other hand, if an early project seems to be distributing tokens to a significant number of participants as means of ensuring its future development, that might be a good signal.
A token’s supply is usually looked at in three different ways:
- The token’s circulating supply corresponds to the number of tokens that have been issued up to the point of one’s analysis and are circulating at the time.
- The token’s total supply corresponds to the number of tokens that exist at the time (excluding all which were or might have been burned).
- The token’s max supply is the maximum number of tokens that can ever be created. In some cases, you will run into tokens without a determined max supply.
If the circulating supply of a given token is seen to be consistently and regularly increasing by its developers, chances are that its value is bound to go up.
Opposite to that logic is when an overwhelming number of tokens get released with a seemingly abusive frequency.
Looking at a given token’s market capitalization will tell you the entire amount of funds that have been invested in it.
In tandem, remember to check its fully diluted market cap because that, in turn, will tell you theoretically what the token’s market cap might look like if its max supply was already in circulation.
A token with a high market cap and low circulating supply could be a hint that it might be more valuable in the future.
Inflationary or Deflationary?
It is of the utmost importance that you are aware of the token’s model.
An inflationary token will not have a max supply and, much like fiat money, can be produced over time.
On the other hand, a deflationary model will have a max supply set, and its max cap is guaranteed to be upheld.
By analyzing these 4 aspects, you can start to comprehend the project’s nature and potential direction.
Comprehending tokenomics is essential to one’s long-term crypto investment strategy (or as a project supporter, if you choose to view it that way) since the components that shape a token will undoubtedly impact its behavior and perception within the community.
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