When you are researching a cryptocurrency, you could use different research methods. This mainly concerns fundamental analysis and technical analysis. Tokenomics are used for both forms of research. This is important data about the supply and price of a cryptocurrency. Let’s take a look at what crypto tokenomics are and how you can use them for your research.
We can already learn a lot about what tokenomics means by looking closely at the word. It consists of ‘token’ and ‘economics’. By tokenomics we mean the economy surrounding a crypto token. Many crypto traders find the tokenomics of a project very important and often decide whether to invest in a cryptocurrency (or not) based on this.
In a fundamental analysis you look at the fundamentals surrounding a cryptocurrency. Think of the qualities of the team, the competitors, the problem that is being solved, the technique that is used, the blockchain on which the project runs, the regulation, etc. Based on a fundamental analysis you determine whether a cryptocurrency is undervalued or overvalued. is.
The technical analysis gives a look at the figures surrounding a crypto coin. Think mainly of the chart, which can say a lot about the future price of a cryptocurrency. You can make predictions for the future based on past price values.
We see that fundamental analysis is mainly used by people who want to invest for the long term. A technical analysis, on the other hand, is usually used by people who invest in the short term (such as day traders).
In both fundamental analysis and technical analysis, analyzing the tokenomics can be useful. This means that it is smart for every crypto investor to learn more about how to research the tokenomics of a cryptocurrency.
This is how the price of a cryptocurrency is determined #
In many cases, the price of a cryptocurrency is determined by supply and demand, when we look at the classic economic model. How that works is quite easy to understand. The game of supply and demand plays an important part in tokenomics.
The moment the demand for a cryptocurrency increases, and the supply (the number of circulating coins/tokens) remains the same or even decreases, there is a good chance that the price of the cryptocurrency will increase. Increasing demand creates more scarcity: less is available, making people willing to pay more (and sellers want a higher price).
Of course, the team behind a project may also decide to put more coins into circulation. The supply then rises. But it is also possible that more people become less interested in the project, causing demand to fall. In both cases, the supply increases relative to the demand. There is a good chance that the price of the cryptocurrency will fall.
What data does the tokenomics show? #
Different data is displayed for the tokenomics. You can draw your own conclusions based on this data. If you want to view this data from a cryptocurrency, you could use CoinMarketCap or CoinGecko. These are both reliable websites that provide information about the tokenomics of a crypto project.
The offer #
When we look at a cryptocurrency’s offering, we see that it shows different types of offerings:
- Maximum Supply (Max Supply) – This is the maximum number of coins/tokens that can be in circulation. This means that no more coins/tokens than this number will ever be created. For example, the maximum supply of Bitcoin is at 21 million BTC coins.
- Total Supply – Many people confuse the total supply with the maximum supply or number of tokens in circulation. Neither is true. As the total supply, all tokens created minus the burned tokens are shown. A project can also take tokens out of circulation. The total stock can never exceed the maximum stock.
- Circulating Supply – The circulating supply represents the tokens/coins currently in circulation. These tokens are therefore freely tradable on the market. The circulating supply can never exceed the total stock or maximum stock.
Market cap #
Market cap, or market capitalization, represents the total value of a cryptocurrency. You can calculate the market cap by multiplying the circulating supply by the price per token. When you have calculated the market cap, you know how much money is going around in a cryptocurrency. It is important to study the market cap well, as it will help you determine the possible growth of a cryptocurrency.
Fully Diluted Market Cap #
If you look at a crypto website, you will also see the fully diluted market cap. In Dutch this would mean ‘fully diluted market capitalization’, although this probably does not provide more clarity. The fully diluted market cap shows the maximum possible market capitalization. The price of a coin is multiplied by the maximum supply. Based on the fully diluted market cap, you can therefore see what the total value of a cryptocurrency would be if all coins were in circulation (and the price remains the same).
We also find the volume within the tokenomics of a cryptocurrency. By volume, we mean the amount of money traded within the cryptocurrency in the past 24 hours. Based on the volume, you can see if a cryptocurrency was popular in the past 24 hours. Incidentally, we find here both the amounts for purchase and for sale. The moment a cryptocurrency is no longer popular and everyone wants to sell their coins, you may also see an increase in volume (although the price of the cryptocurrency may fall, causing the volume to drop).
How do you use tokenomics for research? #
Of course, we don’t just give out the information we provide. You can use tokenomics for research into cryptocurrencies. As we mentioned at the beginning, tokenomics can be used for both fundamental analysis and technical analysis. It is important to understand what a cryptocurrency’s tokenomics can tell. You can take the following situation into account:
Situation 1: Inflation #
It is normal for fiat currencies to lose value over time. More and more coins are in circulation, which increases the supply. This ensures that our purchasing power decreases in the future. This does not always have to cause problems, because wages often rise slowly in line with inflation.
Inflation can also occur with cryptocurrencies. Just look at Bitcoin. A maximum supply of 21 million coins has been set. Not all of these coins are in circulation yet, and will be released in the coming years. The number of coins coming into circulation is getting smaller, but it will take until 2140 before no new Bitcoins come into circulation. Bitcoin’s inflation rate is currently at 1.8%. Compared to many other inflation figures, this is very acceptable.
Other cryptocurrencies have a higher inflation rate. This is because not all cryptocurrencies have a maximum supply programmed into their code. Sometimes developers can determine at any time how many new cryptocurrencies come into circulation. Of course, this does not contribute to low inflation rates.
When the difference between the number of circulating tokens and the maximum supply is large, you can research how the remaining tokens will come into circulation. Does the code state that the tokens will be issued in a few hundred years? This could indicate a low inflation rate. But will 90% of the maximum supply be released within the next two years? That could lead to high inflation.
Situation 2: Deflation #
Developers can also program in a protocol that further shrinks the number of tokens in circulation through burning. This is a technique that makes tokens disappear for good, meaning they will never come into circulation again. In that case, deflation could take place. There are fewer and fewer tokens in circulation, causing the supply to shrink.
Deflation can result in price increases. The condition is that the demand for a cryptocurrency does not fall when the supply also falls. In that case, the relationship between supply and demand will remain virtually the same.
A cryptocurrency that has many functions within a protocol or blockchain and of which fewer and fewer will come into circulation could potentially increase in value over time.
Situation 3: Vesting #
In some cases, certain people or groups from the team behind a project get coins or tokens. Think, for example, of developers, advisors, partners or people who participated in a pre-sale. It is possible that the team decides to set a locking period. This is a period during which these people cannot use their tokens. Often the tokens/coins are only released after a certain time, which can be months or years. The coins are actually in circulation, but cannot be used. When the coins actually come into circulation, the supply of coins also increases.
Using tokenomics can be useful when researching a cryptocurrency. The supply, the market cap and the volume tell a lot about a token or coin. Based on this, you could estimate different situations. Therefore, many crypto traders use tokenomics to perform fundamental or technical analysis.