What is Tokenomics and How it Matters When Investing in Blockchain Projects?

Tokenomics is a combination of tokens and economics, it contains all the elements that make a particular cryptocurrency valuable to investors. It’s an important concept to keep in mind when making an investment decision because a project that has reasonable and well-thought-out incentives to buy and hold tokens over the long term is more likely to survive and succeed. A well-built platform often results in higher demand over time as new investors flock to the project, which in turn raises the price of tokens and the desire to buy and accumulate them.

What is Tokenomics?

To be short, tokenomics is the understanding of the supply and demand characteristics of cryptocurrencies.

In a traditional economy, economists track the issuance of currency using official money supply data. The numbers they report are usually called M1 (measure of the most liquid money), M2 (less liquid), and in some countries also M3 or M4. These measures allow for a transparent evaluation of the currency supply.

Unlike this process, cryptocurrencies and tokens built on the blockchain have predetermined, algorithmically generated release schedules.

This means that we can predict with some accuracy how many coins will be created by a certain date in time. While this release schedule is subject to change for most crypto assets, it usually requires the consent of many people and is very difficult to achieve. This gives some comfort and security to crypto holders because they know that their assets will be issued in a much more predictable way than in the case of governments that simply print money.

Meaning of Tokenomics When Trading and investing in Cryptocurrency
There are several key factors in tokenomics that crypto investors pay attention to when investing or trading cryptocurrencies; these include, but are not limited to: supply, distribution of tokens, and functionality.Supply and demand are the main factors that affect the price of a cryptocurrency, as well as services and goods. There are several critical metrics that measure the supply of tokens.

  • Supply of a Token
    The first is the maximum supply. This indicator indicates the maximum possible number of tokens for a particular cryptocurrency. For example, the maximum supply of bitcoins is 21 million coins. Litecoin has a hard cap of 84 million and BNB is 200 million.
    However, not all tokens have a maximum supply. For example, the supply of tokens on the Ethereum network increases every year. And stablecoins like USDT, USD Coin (USDC), and Binance USD (BUSD) do not have a maximum supply, as these coins are issued based on the reserves backing the coins. Theoretically, their number can grow indefinitely. Two more examples of cryptocurrencies without a limited supply are Dogecoin and Polkadot.
  • The second indicator of the offer is the amount in circulation, that is, the number of tokens available at the current moment. Tokens are constantly being created, burned or blocked in some way, which directly affects the price of the token.

The current number of tokens in circulation allows you to calculate how many tokens will eventually be issued.

  • Functionality
    Often, developers share information about the functionality of the token; whether they are reward tokens or whether they have a specific use, such as discounts, management, VIP benefits, etc.. The utility of a token plays an important role in the development of its value of a token. At the same time, the utility of a token can be very closely related to its distribution. 

Tokens with Good Supply and Demand Value

Note: Cryptocurrencies with low token supply offer an attractive economic base for many investors. The idea is that the lower the supply, the more scarce the cryptocurrency will be over time, and it can lead to an increase in its value.

Conclusion

Cryptocurrency investors tend to consider the future value of cryptocurrencies before investing. Tokenomics gives investors an initial understanding of value. The simple answer to determining value is the supply and demand of a token – this is the most basic understanding even for traders and investors in the stock market. The value of a cryptocurrency is determined not only by market demand, but also by the overall supply, as well as the utility of tokens.

And if you are a crypto investor and interested in investing in cryptocurrencies, we recommend that you do your own research on the tokenomics of the token before investing.

 

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