What is Tokenomics?
Tokenomics is derived from the combination of two words “token” & “economics”. It is the quality of a token that convinces a user or investor to adopt it and help build the ecosystem around the underlying project of the token.
Tokenomics is responsible for variance in price tags of several crypto projects. It is fundamental when determining and analyzing the potentials of a cryptocurrency in order to have higher chances of making more money and profits from these projects rather than losing your investments.
What is a Token?
A cryptocurrency token is a virtual currency token or a denomination of a cryptocurrency that does not have its native blockchain and has the probability to exist on various blockchains. Tokens are designed to carry out specific activities for the projects on which they were created and not just to make fee payments on a blockchain like crypto coins.
Tokenomics factors for Making Analysis
There are several factors to be duly noted when making analysis to avoid incurring unwanted losses and they include;
Token supply and availability
This is a cogent factor to reckon with while making an analysis, as most investors make the mistake of analyzing a token and crypto project based on the abundant supply and simultaneously have a low market cap rather than investing other tokens that are low in supply and have huge market cap value.
For instance, Token A is massive in supply with a market cap value of 9.2billion value while Token B is low in supply with a market cap value of 1.3billion. Using Tokenomics, Token B is the perfect token to invest in because it is more feasible to rise from a 1.3billion to double in value or better still triple the amount so there it is a prospective token/project with huge potentials.
Investors should pay close attention to the market cap values rather than the dollar value and supply when analyzing.
Allocation and distribution
There are two categories of cryptocurrency designs which are; fair launch and pre-mined.
Fair launch cryptocurrencies do not require token allocations because they were mined collectively by a group of people (Bitcoin and litecoin). While
Pre-mined on the other hand have token allocations because all or some of the tokens were minted by the project team before offering to the public by selling most of them during the project launch for fundraising e.g ERC-20 tokens on ethereum.
When too many coins or tokens are allocated to the team and investors it can affect and limit the growth of the cryptocurrency if they decide to sell their allocations in a bullish run.
Vesting and inflation
Vesting schedules apply to pre-mined cryptocurrencies and it is focused on the expectations for the token allocations and distributions in a particular period.
Investors should pay close attention to projects that unlock an excess amount of tokens within a short period because there’s a very high percentage that such token’s price action is on the verge of sinking in a short-term price potential.
While excess Inflation of cryptocurrency reduces the value of the token which is already in circulation and deflation in cryptocurrency helps to increase the value in the long term due to the reduction in supply.
Staking and utility
Staking a coin or token implies that you’re locking that token for a particular period. This process helps to restrict the actual circulating supply of the token and also enhances a positive price action.
Staking also serves as a utility in tokens and “Utility” means anything that drives demand for a cryptocurrency. Bitcoin is the perfect example as it is the most valuable cryptocurrency in the world today because its primary utility is for storing values e.g gold is readily available and accessible in bitcoin and there’s high demand for it.
The Total value locked of tokens helps to know undervalued and overvalued tokens.
The aforementioned tokenomics factors should not be overlooked and stakeholders and investors should take their time to validate their token analysis before diving into them to guarantee a higher percentage chance of making profits.
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