Cryptocurrency has become very popular, which made the discussion of tokenomics important. Simply put, tokenomics explains the economics of crypto projects. However, the cryptocurrency market is considered volatile, so it is essential to research a cryptocurrency's tokenomics before buying or investing in it.
By doing research and understanding tokenomics, it becomes easy to decide whether a cryptocurrency is a good investment.
What is Tokenomics?
Tokenomics combines two words, "Token" and "Economics '. It refers to the science of tokens and the economics behind them. It is also considered to be the study of how cryptocurrency works within a large ecosystem; this includes but is not limited to things like the distribution of tokens and how tokens can be used to encourage good behavior in the network. It explains why a token is valuable and how it attains its price.
What is a Token?
Tokens commonly serve as units of cryptocurrency. They do the same job as physical coins or tokens. They can also be referred to as a simple unit 1 of value that can be passed from one individual to another. They are used for specific purposes and have values based on their distinct characteristics.
Types of Token
There are three basic types of tokens which include: commodity tokens, utility tokens, and security tokens.
- Commodity Tokens:
Gold and currency notes are examples of standard assets that have independent values. Therefore, these assets can be a significant back for tokens. In this case, these types of tokens are commodity tokens.
The values of commodity tokens are backed by some reasonable and tangible assets such as gold. For example, Paxos gold (PAXG) is pegged to the troy ounce of gold in the London goods delivery market, which is currently $1,800.
Another example of a commodity token is silver tokens (SLVT). SLVT is an ERC-20 token on the Ethereum blockchain. As the name implies, SLVT allows people to own silver digitally.
- Utility Tokens:
A utility token is a special type of token designed to be used for specific purposes. For example, it helps in capitalizing or financing projects for companies and organizations. It only has value in using a system but can be exchanged with other types of tokens or cryptocurrencies. Examples include Chainlink (LINK), Filecoin (FIL) and Brave Browser’s token (BAT).
- Security tokens:
Security tokens are digital assets that represent transferred ownership rights or asset value to a blockchain token. It can be created using tokenization. The first step in this process is selecting investment criteria and then entering information into the blockchain. In return, it creates a token. Security tokens are not yet available to retail investors, but many institutions are working to develop and offer them.
How to Use Tokenomics to Determine Cryptocurrency Value
Tokenomics is used to determine the worth of an asset in the future. For example, BitcoinCash (BCH) and Tron (TRX). Bitcoin Cash has the same total supply as Bitcoin. Therefore, it is normal to think that one coin will have a higher value than the other in the future.
However, with more than 100 billion tron existing, for one coin to be valued in the thousands of dollars, tron would need to become the most valuable business in the history of the world; how can that happen?
This question might seem too hard to answer, but it will provide a different way to view crypto assets and help to understand whether a crypto asset is more likely to have a great future than another.
Importance of Tokenomics in Cryptocurrency Investing
In the crypto space, it is essential to understand the impact of supply and demand. These two market forces are significant factors that influence crypto market prices. Crypto tokenomics define an explicit roadmap on how a digital currency will be used. It also clarifies whether there is a defined link between the platform usage or the service under construction and the proposed digital asset.
These factors collectively determine whether an asset will have a growing value. The following questions are essential when it comes to deciding the tokenomics of a cryptocurrency:
- How many coins or tokens are currently in circulation?
- How many coins or tokens will be available in the future?
- When will coins and tokens be created?
- Who owns the coins?
- Are there some coins set aside to be released in the future to developers?
- How does it account for any coins lost, burned, deleted, or rendered unusable?
It is essential to understand the concept of tokenomics for anyone who wants to get into cryptocurrency. This is because tokenomics plays a vital role in the dynamics of a cryptocurrency, which includes nearly everything to do with the token. Therefore, crypto investors are advised to study the project's tokenomics before participating to know the financial and governance rights they can reap by purchasing the token. In addition, a good understanding of tokenomics equips investors with the knowledge and skills to evaluate crypto projects.
This article should not be taken as financial or investment advice. Making an investment or financial decision is a choice. Do your research!
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