When doing your research (DYOR), one of the most important factors we look into is a project's tokenomics. Additionally, plenty of projects claim to be amazing and revolutionary. Still, without good tokenomics, they will soon become worthless investments.
How can you evaluate a potential good token? What do you look for in token's tokenomics to know if it is a good opportunity to make profits?
Do not fall into the illusion of finding similarities with the stock market. Crypto is a different game. So, let us look at the parameters to pay attention to.
Tokenomics, as the name says, is the study of the economic characteristics of a token. It is a crucial factor and probably the most important one, as when you find an interesting project, you will buy the token, not the shares or ideas.
1. Use Cases
The use cases of a token will drive the demand for itself, causing a future surge in price. I saw many projects claiming groundbreaking technologies but with useless tokens.
A token can have many different utilities:
It can be used for payments and transactions.
It can be categorized as earning by distributing benefits to token holders like companies’ profits or incentives.
It can have duty utility, meaning that, to use the product, you need to hold or buy the token
A token can also have a rights utility which means that by buying the token, you can have rights to engage with the protocol or vote for changes, like governance tokens.
Tokens can be used to earn gains by using different DeFi protocols.
Premium perks- by holding or locking the token, you can have boosts for your rewards, discounts for using the platform, and so on.
2. Supply
Supply is another critical metric to consider before investing. Circulating supply indicates how many tokens are tradable, while total supply is the overall amount. Potential releases are quantities of tokens that might inflate the circulating supply. Additionally, the price will drop if insufficient demand exists, and token holders will suffer.
Always look for circulating one to be very high to prevent solid sell pressure due to releases. Also, consider watching tokens with an overall low supply because scarcity and demand are important factors.
3. Token Distribution
When a project is launched, the tokens are distributed between all parties involved, like a team, partners, investors, etc. A non-fair distribution will negatively impact the price of a token; why?
Imagine that VCs are holding a big part of the supply. This will probably mean that they bought during the private sales.
When a token is available for retailers (exchange listing), the price is usually way higher, meaning that VCs and partners will be already sitting on gains(2x/5x/10x, etc.) This will indeed become a sell-the news, and retailers will be slaughtered.
4. Vesting
The vesting period is a period made for restricting the token sale, occurring when investors and partners have bought the token during a pre-sale ICO. The vesting schedule is a plan of dates that indicates when those tokens will gradually be released.
This is another essential metric linked to the token distribution for the reason I previously explained. Token unlocks are the tool you need to watch future coin releases.
5. Stabilization Mechanisms
Stabilization mechanisms are processed from projects to stabilize the price of a token in the long term. The main ones are burnings (permanent removal of a part of tokens) or buybacks (companies use part of their funds to buy tokens from the market).
Stabilization mechanisms also include staking and lockups, which temporarily reduce possible sell pressure. It’s always important to look at deflationary models when they are boosts for price surges if combined with overall good tokenomics.
Final Thoughts
As we have seen, tokenomics plays a crucial role in the potential appreciation of a token which is the core thing investors want.
Paradoxically, a bad project with good tokenomics can do well in terms of price (not sustainable in the long period, of course), but this rings as an essential reminder to spend ample attention on this metric when studying a new project.
You will find the tokenomics of a project on official sites (whitepaper) or by community members.
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