There are many cryptocurrencies in the world today. According to CoinMarketCap, a market research website, over 10,000 different cryptocurrencies are publicly traded. So to know the value of a coin or token is worth investing in, investors need to understand tokenomics. “What is Tokennomics? Why is tokennomics important when investing in cryptocurrency? GIG will present it in the following article.
What is tokenomics?
Central banks control the interest rate and money supply to maintain a stable price for a country’s currency and grow the economy. Economists call this monetary policy.
Cryptocurrencies also have such systems in place to control supply. A cryptocurrency’s monetary policy is determined by the issuing entity and the network’s tokenomics.
Tokenomics, short for ‘token economics,’ refers to the rules governing a cryptocurrency’s issuance and supply. Token issuers often have detailed plans for presale, open sale, schedule, price, and total circulating supply.
In addition, tokenomics of digital assets help investors easily understand the max supply of tokens, groups of people who could have the most extensive ownership, and member benefits when participating in the ecosystem of that token project.
To sum up, tokenomics is an essential factor for tokens that greatly influence participants’ investment decisions.
How are tokens used in tokenomics?
Tokenomics covers all essential aspects of managing a digital token – either by code or by a centralized issuing entity. GIG will share some information about the role of tokens in tokenomics.
- Ownership: Tokens can be used to represent ownership in a crypto project. The percentage ownership of the founding team and investors are often expressed in a venture’s tokenomics.
- Raising money from the public: When a cryptocurrency project is launched to the public, it may issue tokens on the blockchain in exchange for other cryptocurrencies. Its tokenomics will determine how much it is raising, what currency it uses, and the schedule to distribute the tokens to investors.
- Governance: This is a vital part of any token’s economics. Tokens often determine the voting power of each community member. In the early stage of a crypto project, the core team is typically responsible for dictating the minting of new tokens and project direction. It often reverts to token holders to vote for product features and token economy changes.
What is a token burn?
A token burn is a process of permanently removing tokens from circulation with the aim of reducing the total supply.
If a crypto project executes a burn function to destroy its tokens, the tokens will be gone forever. It’s impossible to recover tokens once they are burned.
One of the ways crypto projects burn their tokens is to purchase some of the tokens from the market and transfer them into a frozen private address called a ‘burn address.’ There’s no way to reverse the transaction or withdraw the coin from that address.
Token burn is a strategy used to control the price of the token in the market. Token burn is a deflationary mechanism in tokenomics, serving the benefit of the community, limiting or preventing actions that harm the investment ecosystem. At the same time, this activity also helps increase the token’s value and curb potential price inflation. The stability of the token creates a great incentive for the holders, thus resulting in better network uptime and bandwidth.
Which Tokenomics Factors to Consider When Investing?
Many factors can determine the price of a token and a cryptocurrency. These include the following factors:
Total Supply and Market Cap
When looking at a cryptocurrency, it’s important to look at the total supply of token. The total token supply here is the number of tokens in existence at the moment, not counting any tokens that may have been burned. Usually, cryptocurrencies with a limited total supply may have an increasing value in the future and vice versa. This happens because scarcity causes a shortage in the market. Need requires an increase in price in order to reach an equilibrium.
Market Cap is a factor in tokenomics that shows the total amount that has been invested in the crypto project to which a particular token belongs and has a strong relationship with the supply. Fully Diluted Valuation (FDV) is a hypothetical estimate of the market cap if the total supply of cryptocurrencies is in circulation.
The formula for calculating market capitalization:
Market Cap = Circulating Supply x Current Price of token
Circulating Supply = Onchain supply – Burned tokens
Fully Diluted Valuation =Current Price of token x Max Supply
The above formula shows that the higher the market cap, the lower the token supply, the more valuable the token will be over time.
On the other hand, if the supply is unlimited, the future price may not increase as much as if the supply were limited.
In a sense, the market cap is an essential factor to consider before you invest. A lower market cap (less than $1 billion worth of market cap) might mean that the cryptocurrency has more potential to grow. Large-cap cryptocurrencies (more than $10 billion worth of market cap) might be a safer investment, but their growth potential tends to be smaller.
Allocation and Distribution
The token allocation plan is essential for the sustainable and long-term development of a project. You can find information about this plan in the white paper of the tokens.
This section should note the Token locking schedule—how the project distributes tokens to advisors, the development team, and investors. Usually, the longer the development team’s token lock time, the more likely it is that the team will be with the project for a long time.
The supply and value of tokens is also an essential factor. You need to carefully study how much the advisory team, the development team, the investors can buy and what the price is in the seed round, private sale, and public sale.
In addition, it is also necessary to clarify more information after unlocking, how will the amount of tokens be distributed to the owner? To be proactive and make informed decisions.
The team of founders, experts, programmers, etc., behind the project is an essential factor to consider before investing. A trustworthy token project must be led by a team of reputable and experienced advisors. Investors will rely on information about the development team to evaluate whether the project is worth trusting or sustainable development. A professional R&D team will usually have a very reasonable, intelligent, and in line with market trends in issuing tokens. The team’s token locking schedule is lasting, proving they work seriously and have a long-term vision.
Vesting and Inflation
When a cryptocurrency is premined, people running the cryptocurrency can decide to lock up the circulating supply and gradually release the tokens. This assures retail investors that institutional investors won’t get a hold of all their tokens at once and cause an unbalanced market. However, the release of tokens must be logical, meaning that the distribution is done at low amounts throughout the years.
Inflation refers to the change in the value of the existing tokens after releasing many tokens at one time. If many tokens were in supply, there would be a surplus. And whenever there’s a surplus, a decrease in price follows. On the other hand, deflation is the opposite of inflation, where the possibility that the existing supply may decrease causes an increase in the cost of the tokens in circulation.
Why is tokenomics important when investing in cryptocurrency?
The factors that make up the code for cryptocurrencies are essential for investors to know, as they will undoubtedly influence the investment and the expected return. Tokenomics is essential when investing in crypto because it will show the value of a crypto token might be in the future.
Understanding cryptocurrency tokenomics before investing can help you identify some of the factors that will impact the price of a token. You will know how many tokens are in circulation, how much more is still coming into circulation, and who the project’s largest owners are.
Tokenomics is everything related to a token in cryptocurrencies. Therefore, you should carefully analyze each Tokenomics factor before investing in cryptocurrencies. Hope this article is about “What is tokenomics? Why is tokenomics important when investing in cryptocurrency?” will be helpful for everyone. Subscribe to GIG Dollar to stay up to date with the latest news on blockchain, cryptocurrency, digital asset investment, etc.
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