10. How to verify a cryptocurrency project – cryptocurrency tokenomics
As the name suggests, the word ‘Tokenomics’ is a combination of the word ‘token’ and ‘economics’. It also imposes on us certain associations with economics. And as in economics, so do important metrics and values ☺ This is exactly the case with Tokenomics. Although the word has no official definition, it has become accepted in the crypto world that we call Tokenomics all the indicators that affect the value and valuation of a cryptocurrency. These indicators include, among others, the properties of a given cryptocurrency, its characteristics, supply, timing or combustion functions. From the investors’ perspective, these are very important as they affect the proper valuation of digital assets. In today’s lesson, we will look at all of them. So, pens in hand and get to work!
Tokenomy – an important thing!
Before we get into the analysis of the features that influence the valuation of a given cryptocurrency, let’s answer the question of why Tokenomics is so important in the crypto world. Well the answer is short and simple. It is the main and most important tool of fundamental analysts. Just as with products such as food, it’s hard to value a cryptocurrency based on a single method. Added to this is the lack of historical data and the relatively young age of blockchain technology, which by the way also affects the value of a given asset. And this is where Tokenomics comes in. It allows analysts to understand the true value of a cryptocurrency or project. The knowledge you get today will be useful for your next analysis of tokens, cryptocurrencies and projects. You will be much more likely to assess their potential value before you invest your money in them.
Key factors in the valuation of a digital asset
You probably know that economics is divided into microeconomics and macroeconomics. In the case of tokenomics, we have the same division. Only with a slight difference in names and definitions. Macrotocenomics studies the properties of the blockchain and the correlations between the blockchain and third parties (exchanges, other governing bodies). Microtokenomics examines the properties of the blockchain in detail and focuses on the variables affecting the change of certain functions in the blockchain. To realistically value an asset, we need to analyse:
● Supply. It directly affects the interest in a given crypto asset and how its lack of circulation will affect potential investors. If the supply of an asset is low, then it is more readily purchased and usually its price is higher. Similarly, if the supply of an asset is high, then its value is much lower. However, this methodology is not always accurate. Remember – there is demand, there is supply. Just because your painted picture will be the only one in the world does not mean it will sell for a million dollars.
● Purpose and functionality – what is the function of the asset in the ecosystem? What is its purpose? Will it have a market for trading? Additionally – what exchanges will enable it to be traded? For projects, it is also worth answering the question of whether the asset is a way to accelerate fundraising or whether it has a long-term, important purpose.
● Token burning – as you know from previous lessons, this method is used to permanently remove an asset from circulation. It is also a way to increase its price. Remember – regular burn events introduce the so-called supply shock and automatically increase the value of a given asset. It is worth bearing in mind, however, that this is a method that works in the short term. In the long term it does not guarantee any stability.
● Inflation, a selling schedule otherwise known as monetary policy. Yes, cryptocurrencies also have their ☺ Just like the dollar and other fiat currencies. It is very frequently used to raise, stabilise or increase the price. When we mention the sales schedule, we mean the number of new coins created or issued in a certain period of time. Logically thinking – the more cryptocurrencies we create / spend, the more their value decreases. By acting in reverse, we can have a positive impact on the price and at the same time increase the demand for a given cryptocurrency. The selling schedule can also be set in advance.
● Distribution of digital assets. When releasing a new token or cryptocurrency, developers have two options. Launch an asset where the opportunity to purchase it is fair to all. In the crypto world, we call this a “fair launch”. The second option is to create a full or partial supply “upfront”. We call this method “pre-mine”. Then the asset is distributed to the founding team or private investors at the very beginning. In the second place are the public.
● Project Capitalization – Market Cap. It tells us how much all the tokens / assets on the market are worth. To put it mathematically, if we have 1 million tokens on the market at $10 each, then MC is $10 million.
● FDMC – Fully Diluted Market Cap. Translating this into Polish we have a very lame translation of “diluted market capitalisation”. Nevertheless, it is a very important indicator determining the value of the given asset. It is the FDMC that tells us how much the tokens will be worth once they have all been minted. When you analyze the market, you don’t take into account the fact that there are more and more assets on the market over time. Over the course of a year, their number increases by several hundred percent! So based on the Market Cap alone, you can get…screwed.
● Circulating Supply – an indicator that shows us how many tokens/assets are currently available to buy or sell across the market.
● Max Supply – tells us how many tokens a given smart contract can produce. In Ethereum, for example, their number is limited.
● Total Supply – is the sum of tokens already minted (Circulating Supply) plus tokens staked, burned or blocked. In short, not available on the market.
How do I find information about a project that interests me?
Go to coinmarketcap.com or coingecko.com or coinpaprika.com and choose the cryptocurrency you are interested in from the list, we chose BNB- Binance coin.
BNB’s price is currently $316, what interests us is some information:
Circulating Supply- this is the amount in circulation of a given cryptocurrency
Total Supply- this is the maximum amount that a given cryptocurrency can be
Market CAP- market capitalisation, this is an important piece of information about a cryptocurrency, it tells us the value of a cryptocurrency. How is it calculated? The amount of a given cryptocurrency in circulation x the price at a given moment.
Fully Diluted Market Cap- this is the market capitalisation if the maximum amount of a given cryptocurrency would be in circulation
If some information is missing or you want to find out more it is worth checking the WhitePaper of the project, the external pages of the project or in the documentation. Tokenomics is an important aspect of any project, so it is worth checking more carefully.
What you should pay attention to is the distribution of tokens, especially in new projects, this is information on who will receive how many tokens, how many will be on sale, how many will be left for project owners. It is also worth noting whether the tokens will be immediately unblocked for everyone to sell or, for example, will be blocked for a year for advisors so they can not sell, or whether there is an option to unblock a specific pool at a certain time. This is particularly important for projects that have a large portion allocated to the company, advisors, marketing, and a small pool is offered for public sale.
If you are just starting out with fundamental analysis and tokenomics, it is worth using sites that can help you with this – one of them might be https://messari.io/asset/binance-coin/profile/supply-schedule, which presents the most important information about the project in the following tabs.
As you can see, many factors contribute to the valuation of an asset.
Tokenomics and the usability of a given token
Analysing the economics of a token thankfully doesn’t just stop at analysing how tokens are distributed between private investors, public investors and the team. You also need to understand what tokens are used for and try to imagine different scenarios to predict whether the market will want to buy or sell.
We will not go into how tokens are created. That’s a topic we discuss in another lesson. Nevertheless, the valuation of a token, is very much affected by what it can be used for. And even more so when these activities affect its quantity available on the market. A token can perform the following functions:
● It must be a means of exchanging value.
● Charging for services on the network.
● Participation in project management.
● What it is to be used for.
● Can be burnt
● It should bode well for the future.
● It cannot just be a carrier of value.
● It must be inflation-proof.
● It has and maintains a high value.
● It appears on the stock exchanges.
● It is useful in the ecosystem.
Tokenomics is very interesting. It allows us to assess how a given token will be used. To a large extent, it provides us with information about the success or loss of a given cryptocurrency. Such data analysis, on the example of the above features will provide you with better investments. Moreover – more and more companies are tokenizing their products and services. Thus, the knowledge you have after our lesson allows you to better assess the attractiveness of a given project.
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