As a fundamental analyst and a Degen, I’ve successfully invested and made money from numerous projects by understanding the token and its tokenomics
Many traders/investors neglect this research phase and end up as exit liquidity in the blockchain space.
Before we delve into the world of tokenomics let’s take a look at the meaning of a token
What is a Token?
A token is a digital unit of a cryptocurrency that is used as a specific asset or to represent a particular blockchain. It can either be swapped or exchanged with another blockchain. Some token rewards their users for providing liquidity.
We have 2 main classifications of tokens:
Fungible tokens: Physical money and cryptocurrencies are “fungible,” meaning they can be traded or exchanged for one another. They’re also equal in value, one dollar is always worth another dollar anywhere, and one Bitcoin is always equal to another Bitcoin anywhere.
Non-fungible tokens: Non-fungible token (NFT) is a non-interchangeable unit of data stored on a blockchain, a form of digital ledger, that can be sold and traded. It is also known as the tokenization of assets such as real estate, artworks, pictures, and collectibles with NFT has sparked a new wave of digital ownership revolution while also showcasing the potential of tokens. For example, you reading this article, you can’t be interchanged with another person (you’re unique).
Types of token
Layer 1 tokens: These types of tokens are native to a particular blockchain and are used to power all of the services in the blockchain. They pose as a house to solve the blockchain trilemma. The AVAX on Avalanche is an example of the Layer I token in cryptocurrencies. Algo on the Algorand network is another well-known example of a Layer 1 token in cryptocurrencies.
Layer 2 tokens: This refers to a secondary framework or protocol that is built on top of an existing blockchain system. The main goal of these protocols is to solve the transaction speed and scaling difficulties that are being faced by the major cryptocurrency networks. The MATIC on Polygon is an example of a Layer 2 token in cryptocurrencies. IMX on the Immutable X network is another well-known example of a Layer 2 token in cryptocurrencies.
Security tokens: Security tokens are called investment contracts, and they must meet several conditions for the same. These tokens are subjected to securities and regulations. In simple terms, security tokens on blockchain will get their value from tradable and external sources. For this reason, they will always be subject to government regulations, making them a safer choice. The way Blockchain Capital (BCAP) on the OpenFinance network works is one of the examples of security tokens.
Utility tokens: A utility token is a crypto token that serves some use case within a specific ecosystem. These tokens allow users to perform some action on a certain network. A utility token is unique to its ecosystem. An example of utility tokens is Filecoin (FIL) a decentralized digital storage platform.
Let’s get down to understanding Tokenomics
What is Tokenomics?
Tokenomics is the understanding of the supply and demand characteristics of cryptocurrency. It refers to all tokens features that make it desirable to investors/Degens.
Allocation is an allotment of tokens or equity that may be earned, purchased, or set aside for a certain investor, team, group, organization, or other related entity. It is always found in a project’s whitepaper
Take a look at this example below:
What is Token Distribution
This can come in form of IDOs, ICOs, Pre-sale, the fair launch of a project
A fair launch is when a cryptocurrency is mined, earned, owned, and regulated by the entire community. Before making the token public, there is no early access or private allocations. Bitcoin, YFI, and Dogecoin are a few examples of this.
Pre-Sale, on the other hand, is when several of the crypto tokens are generated and distributed to a select group of addresses (typically project developers, early investors, and other team members) before they are made public.
If there is an unlimited supply, a token is considered inflationary. ETH is inflationary because there is no maximum supply limit. On the other hand, BTC is considered a deflationary token because only 21 million BTC will ever be mined.
BTC is the most popular and highest market cap cryptocurrency. ETH is the second most popular and second highest market cap cryptocurrency. The token model (inflationary or deflationary) must be considered along with other factors.
More examples of inflationary tokens, are Dogecoin, Shiba Inu, Chainlink, axis infinity, flow, helium, etc
More examples of deflationary tokens, are Crypto.com (CRO), Ripple, Litecoin, Terra.
Total Supply: The total token supply refers to the number of tokens that are in existence presently, excluding any that have been burned.
Circulating Supply: The circulating supply of a token refers to the number of tokens that have been issued thus far and are presently in circulation.
Max supply: Max supply is the maximum number of tokens that will be ever created on a project’s blockchain.
Market Cap: This refers to a metric that measures the relative size of the token. It is calculated by multiplying the present market price of the token with the total number of tokens in circulation.
While the market capitalization of a crypto token may provide some insights into its performance and size, it is crucial to note that it is not the same as money inflow. Therefore, it does not reflect the amount of money in the market.
Factors to consider while conducting tokenomics research.
Hodlers: Checking to see if there is any wallet that is hoarding a considerable percentage (eg 30 to 50% above) of the circulating token supply. If there is, there is a high chance of the whale dumping its holdings and causing the price of the token to drop in a moment.
Liquidity: There are tools used to check if liquidity is added to a project. Liquidity is the soul of finance; without it, you can be used as exit liquidity by the whales. So always check if liquidity has been locked and added to a project.
Total supply: Circulating supply: How many coins or tokens currently exist? How many will exist in the future and when will they be created? These are the questions you should ask yourself if you’re about to invest in a project.
There are numerous ways to check if a project is good to invest in but these are one of the top 3 you need to check out before buying into the project. Remember this is NOT a Financial advice.
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 cryptocurrencies.
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, this should set you on the right track.