What's The Real Value of Crypto?
Hello Friends 👋
2020 witnessed financial markets across the world come crashing down during the Covid-19 pandemic. However, 2020 was also the year that saw the crypto space grow by leaps and bounds, as a large number of new investors got introduced to cryptocurrency as a profitable alternative investment during the year.
Nowadays, as new DeFi projects keep arriving within the crypto sector every day, it might be difficult for a new investor in the crypto space to discern which cryptocurrency to invest in. You might be questioning how exactly you perceive a particular cryptocurrency’s value - indeed, what gives a cryptocurrency its value? Well, a crypto’s tokenomics can give you a pretty good idea of whether you should consider investing in it or not.
If you’re not aware of what tokenomics is, in this post, we give you some insight regarding a particular cryptocurrency’s tokenomics, and what factors you should check for when evaluating a crypto token’s tokenomics.
What is Tokenomics for a Crypto Token?
A crypto token in case anyone needs to recall the definition- is essentially a crypto coin based on a blockchain platform that can be exchanged with another blockchain, and that provides many incentives to the holders of said token.
Now, tokenomics. The term is formed by pairing up the two words token and economics. So the word tokenomics basically points to the economics of a crypto token; tokenomics refers to all the qualities of a crypto token that makes it appealing to investors. The tokenomics for a particular crypto token is usually thoroughly discussed in the project whitepaper, and it should help you grasp the functionality, objective, allocation policy, and more of the crypto token.
What Factors Are Included in Crypto Tokenomics?
To put it simply, any factor that even remotely concerns the value of a crypto token should be taken into account when considering its tokenomics. Below we’ve rounded up a list of some of the key metrics you should check for when trying to decide a crypto token’s worth. Notably, most of the factors that make up a crypto’s tokenomics are usually found in websites like CoinMarketCap and CoinGecko, but still do verify with the project whitepaper to be sure of their precision.
#1. The Allocation and Distribution of Tokens
Check to make sure you know how the token is being distributed. There are two basic ways most crypto tokens are generated- they’re either pre-mined or released through a fair launch.
A fair launch is when a cryptocurrency is mined, earned, owned, and governed by the entire community. There’s no early access to the token or private allocations before making them public. Bitcoin, Dogecoin, and YFI are good examples of this. On the contrary, pre-mining is when a number of the crypto tokens are generated and distributed among some exclusive addresses (usually project developers, other team members, and early investors) before going public.
Most crypto projects these days come with pre-mined tokens, so you must not be wary of a project simply because some tokens were minted before it went live. However, check if there’s any wallet that keeps hoarding a significant percentage of the circulating token supply since this means there’s a huge risk of the whale dumping their holding and dropping the price of the token in an instant.
On the other hand, if the project is distributing its tokens to as many participants as possible, you can assume the project is a legitimate one, and genuinely cares about further development.
#2. The Supply of the Token
A primary component of a crypto’s tokenomics is its supply of it. Now, there are three types of supply you should check for when it comes to crypto. There’s the circulating supply, the total supply, and the max supply.
The circulating supply of a token is the number of tokens that have been issued so far and are currently in circulation. The total token supply is the number of tokens that exist at present, excluding any that might have gotten burned. And finally, the max supply of a token is the maximum number of tokens that can ever be generated. For some tokens, there’s no determining max supply.
If you notice the circulating supply of a particular token has been regularly increased by the project developers over time, you can assume that the value of the token will be going up in the future. On the other hand, if there are too many tokens being released at once or too frequently, the value of the token might go down.
#3. Market Capitalization
The market capitalization of a token shows the entire amount of funds that have been invested in the crypto project so far. Along with the market cap, you can also check the fully diluted market cap of a project, which is the theoretical market cap if the max supply of the token was already in circulation. This would give you a good idea of how you should value a token.
The higher a token’s market cap and lower its circulating supply, the more valuable it could be in the future.
#4. The Token Model
Make sure you know if the token is inflationary or deflationary. An inflationary token (like fiat money) doesn’t have a max supply and will continue to be produced as time goes on. A deflationary token model is simply the opposite, where there’s a max supply the token is capped at, like Bitcoin’s 21 million. Most proof-of-stake tokens like ETH are inflationary so as to reward the validators and delegators in the network.
It’s notable that some crypto tokens also have a dual token model (like MakerDAO’s MKR and DAI) where one token is used for funding within the ecosystem and the other is a utility token.
Tokenomics is an incredibly important concept for you to understand when you’re trying to decide which crypto to invest in since the factors included will definitely affect your investment. But do keep in mind that you should also seek answers to some other questions while trying to value crypto.
For instance, you should look for details regarding the project’s team and the team members’ backgrounds (look for them on social media), the token’s historical performance, its use cases, and if possible, data gained from technical analysis.
For more info, I would recommend reading this interesting and educative article on Investopedia as well -
If you want to share anything or have any suggestions/questions, please leave them in the comments!
That’s it for today :-)
Hope each of you has a great start to your day. I’ll talk to everyone tomorrow.
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