It’s no secret that cryptocurrency (and blockchain) is one of the hottest topics in 2017-2018. There are many great articles explaining why to invest in them, so I’ll keep this part short.

Today, the process of moving money across businesses, customers, governments works through a number of intermediaries and middlemen. Bitcoin came about as a means to cut the middleman by creating a new currency which didn’t involve any monetary institutions and avoid the unnecessary interchange fees. So the Bitcoin architecture (blockchain) and “altcoins” (Bitcoin alternatives), can disrupt many of these intermediaries and act as a layer similar to the central banks — which addresses the big headache of not holding any liabilities.

The general view on Wall Street is that the crypto market as a whole is significantly overvalued, with many arguing that bitcoin has no intrinsic value and thus cannot be evaluated.

However, there have been many signs lately of legitimacy, that signal a positive growth in the upcoming year.

For example, The launching of bitcoin futures on CBOE and CME (and Nasdaq later this year) has been considered as a major achievement in bringing cryptocurrency to the mainstream. This will allow investors to have plenty of options to bet on bitcoin using more traditional financial vehicles.

In addition, China’s largest Bitcoin exchange (prior to the cryptocurrency trading ban imposed by the local government) is reallocating to Japan and South Korea, the second largest cryptocurrency market in the world. The emergence of large-scale cryptocurrency exchanges will lead to an exponential growth rate of local cryptocurrency markets in both Japan and South Korea.

Nonetheless, one of the biggest names in Silicon Valley, Peter Thiel, is placing a moonshot bet on cryptocurrency, by investing hundreds of millions of dollars. Cybersecurity legend John McAfee, has also predicted lately that Bitcoin might reach $500,000 by the end of 2020.

While Bitcoin is currently receiving most of the public’s attention, it has no underlining business model that drives it. Moreover, as the price of Bitcoin rises, so does the mining difficulty and therefore the reward miners receive. This means that it will take longer and become more expensive to make transactions using Bitcoin as the price rises, which makes it an unreliable asset.

Many however, see it as digital gold, since it’s a gateway to buying most of the alternative cryptocurrencies. To buy bitcoin, consider using Coinbase or Binance.

Personally, I believe that cryptocurrencies must solve a problem and there needs to be an underling business model and clear vision, in order to succeed in the long term. Investors are beginning to understand that and are rapidly turning to altcoins (cryptocurrencies alternative to Bitcoin).

Making sure that the assets remain valuable is a significant part of designing and developing a cryptocurrency. The most popular coins and tokens that remain firm despite the markets have underlying qualities that keep their demands up, with investors and users utilizing the asset’s underlying platform. The economics of crypto assets is important for their success and is referred to as tokenomics in the crypto world.

Tokenomics is the parameters set by the creators of the cryptocurrency that define how it interacts with protocols and its users all the way from its issuance. Tokenomics is an important factor influencing cryptocurrency’s supply and demand. Ideally, well-defined tokenomics correlate to great demand for the asset, keeping them valuable always.

Take Bitcoin, for example. The cryptocurrency remains highly relevant even a decade after its introduction and holds the highest value of any coin or token. While it has many things going for it, one of the main reasons for its relevance is its tokenomics. Bitcoin’s tokenomics define a hard cap on the number of BTC that can ever be in circulation — 21 million BTC. The finite supply ensures scarcity of the cryptocurrency, making it like gold or any other scarce asset. On top of Bitcoin’s scarcity, its issuance through its mining process is reduced in half, periodically, every four years. This allows the digital currency to remain deflationary and remain strong in value.

Ethereum, on the other hand, is more liberal with its supply. While there is no hard cap on the limit to the ETH in supply, there are caps to how many coins can be minted yearly. However, the protocol eliminates coins from its supply in a process called burning to introduce deflation to the increasing supply.

As evident with BTC and ETH, which are the two biggest cryptocurrencies by value and market capitalization, good tokenomics are indispensable to the success of cryptocurrencies. Projects must work on figuring out ideal ways to maintain a balance between their native token’s supply and demand to prevent issues like hyperinflation or illiquidity. To achieve a working balance while keeping the assets valuable, most crypto projects implement certain elements to foster good tokenomics.

Incentivization is an important aspect of a cryptocurrency’s tokenomics as it rewards users for efforts like taking part in protocol consensus or for staking liquidity into pools. The incentives are often provided by protocol native tokens. For instance, miners on the Bitcoin network are rewarded with BTC for keeping it robust. Incentivization on blockchain protocols is also used to mint and distribute cryptocurrency. Further, dApps like DEXs and borrowing platforms incentivize users to lock funds into liquidity pools with liquidity mining tokens. UniSwap rewards liquidity providers with the UNI token, which holds good value as UniSwap is the biggest DEX.

Incentivization encourages users to utilize protocols that bring genuine use cases and drive up the value of their native tokens in the process.

The amount of cryptocurrency in circulation, the cap (or lack thereof) on the amount, and how new cryptocurrency is introduced into circulation are very relevant to the asset’s demand. Minting assets haphazardly in abundance can lead to inflation, thereby negatively affecting their demand.

Bitcoin and Ethereum supply newly minted coins into circulation through their block creation process as incentives. The amount of coins entering circulation is kept constant, with Bitcoin and Ethereum adopting their own mechanisms to address inflation. Projects look to introduce scarcity to their crypto supply to increase demand.

Inflation is a real issue with the constant issuance of tokens into blockchain and dApp ecosystems. The increase in the number of assets eventually leads to the value of each unit diminishing. The rolling out of cryptocurrencies for incentive and utility purposes cannot be halted, obviously. So, cryptocurrency projects introduce mechanisms to remove cryptocurrency from circulation by sending them to wallets that can receive but not transfer funds. This process is known as cryptocurrency burning and is utilized by Ethereum to keep its supply deflationary.

The utility provided by tokens is another important element of its tokenomics. It is obvious that tokens that possess utility will gain more demand than those that have no utility. Coins and tokens are used to pay transaction fees, reward network participants, govern protocols, and rise in value because of the organic demand. Tokens that only rise in value due to hype are found to crash and never recover when the markets start taking a turn.

Tokenomics is one of the most important factors guiding the success of any cryptocurrency. Without the right measures taken to maintain the demand for these assets, they eventually crash. Therefore, it is important for those acquiring crypto to understand the tokenomics of the coins and tokens to make better investment choices.

Simultaneously, tokenomics is of great significance to cryptocurrency protocols. Projects that implement their native tokens efficiently provide the necessary utility to the tokens, bringing extensive use cases. This attracts users to protocols and drives the value of cryptocurrencies immensely.