Tokenomics can be described as the economics of how cryptocurrencies work, just like banks & governments have monetary policy to control fiat currencies (currencies issued by governments that aren’t backed by any commodity such as gold or silver), crypto has tokenomics which anyone is able to view in order to guess if the token has any chance to succeed.

Why is it important to know about tokenomics… Well, most of the time it’s a good idea to know you want to understand where your hard-earned money is going, how it will be used and how the processes operate, just like if you order food at a restaurant you like to see the menu and what goes into the meal.

Unless you’re a full degen and choose to ape in or YOLO all your money into the next hyped shit coin, pump & dump, blatant ponzi schemes or pensions funds managed by someone who care more about their fees than your portfolio. 👀

This is why you might hear people say things like “So what’s the tokenomics, the supply, market cap, ect.“ when talking about new tokens or/and projects and that makes sense, you should know what you’re throwing your money at investing in.

IMO some good basic questions to ask are:

• How many coins exist?

• How many coins will be added (how & when)?

• Is the supply inflationary (increasing) or deflationary (decreasing)?

• wHaT iS tHe uTiLiTy, which is a very sensible an fair question, for example, can they be used for more than just trading or can they be staked, ect.?

• Is there a real-world use case?

• Who are the whales (who owns the majority of tokens)?

• Is the distribution spread out or concentrated?

This is just them asking how it works, so they can figure out if it’s a project that they see as valuable for the short term or/and long term - There’s quite a bit to unwrap so I’ll try to explain it as best as I can.

• Supply

• Demand

• Distribution & Allocation

• Market Cap

• Deflationary vs. Inflationary

• ROI (Return on interest)

• Roadmap

• Where are the builders

This just means that how many tokens there are in total.

• Circulating: How many tokens are currently available or/and in use. A slow & steady increase of the circulating supply can be positive, meaning there is active mining hence activity in the project, so you could expect the token value to increase. However if too many tokens are released quickly or/and too often, then that could effect the price negatively.

• Total: Circulating tokens minus burned tokens (tokens that are permanently removed from circulation by being sent to a wallet address that can’t be accessed, so those tokens are lost).

• Maximum: The total number of tokens that can ever be produced, some tokens have a max supply such as BTC whereas others don’t have a max supply like ETH.

This means how many people want the token.

• Simple supply & demand, if there is a high demand for the token but a small supply then it’s logical to assume the price would rise. Vice versa, if there is too much supply and not enough demand then the price may fall.

How the token is shared and the spread out amongst the holders. It’s important to make sure that the tokens distributed fairly and that the holders don’t have a large percentage or it could be a sign of whales who could easily manipulate the market and cause pump & dump scenarios.

• Pre-mined: A select group are granted tokens before they’re offered to the public on public sale, these groups can be the developers, team, private investors & VC’s.

• Fair launch: Everyone has access to the tokens at the same time/price.

Can be used to indicated token value, popularity & size of the token.

• Current price x circulating supply = Market cap

• High market cap but low circulating supply has potential to increase over time.

This means is the token gaining or loosing value. Can be used to indicated token value, popularity & size of the token.

• Deflationary: Has a maximum supply, for example with BTC there is a max limit of 21 million BTC that can be mined & brought into circulation.

• Inflationary: No maximum supply, such as Dogecoin.

How much cashflow or income a token can create

• This can be done in different ways, which includes staking, liquidity pools, being a validator for the network, etc.

This is a plan for the project, it can come as a pitchdeck or whitepaper, ect.

• Addressing current challenges and anticipating future challenges, do they already have solutions and/or are they currently working on solutions?

Basically, is the project growing, plateauing or shrinking.

• Does the project or ecosystem have a lot of activity from people working in the space to build, develop and/or grow. If there are, you can assume that’s a positive sign for the project to improve (& hopefully the price to follow).

I hope that made sense and was clear, or at least gave you a slightly better idea of what tokenomics are, hopefully, you can use your newfound knowledge to research & avoid YOLO’ing all of your savings into the next x1000 token that you found on reddit …

Next, we’ll check out & compare the tokenomics of BTC & ETH.

👉 Part 2