Cryptocurrencies are digital assets that are not tied to any physical assets. But on the trading market, cryptocurrencies still have value and even exceed diamonds' value at some periods.
After cryptocurrencies have been around for a few years, the financial principles of demand and supply theory were the most playing factor. Has the upper hand in the price of crypto and the coin valuation.
Still, crypto is seen as one of the riskiest investments because the price can change a lot in a short amount of time, which means that investors have a greater chance of either making a lot of money or losing all of their money.
The Aspects of Supply and Demand
Did you know the most innovative way to study tokenomics is by understanding supply and demand?
Supply
Let us say today the Bitcoin team decides to double the supply of BTC. It would crash badly.
This means scarcity is fundamental. But why and how?
Analogy: Though water is necessary for survival since it is relatively available in all parts of the world, there is no high demand for it. On the other hand, diamonds welcome a higher demand due to their perceived rarity and value as a luxury good. Generally, goods with high demand and low supply tend to be more valuable, while goods with low demand and high supply are less valuable.
The same thing happens in crypto. Projects with limited supply are more valuable than those with plenty of supply.
When doing a supply-side analysis for a project, it is vital to ask some general questions:
How is the supply of the token being managed? Is it fixed, or is there a mechanism for creating new tokens?
What is the token's total, circulating, and max supply?
Are there any vesting periods for tokens held by the team or early investors? If so, how will this affect the supply of tokens on the market?
Are there any plans to burn tokens or remove them from circulation permanently? How will this affect the supply of the token?
Are there any incentives to encourage token holders to hold onto their tokens rather than sell them on the market?
Are there any other factors that could impact the supply of the token in the future?
Demand
While the supply side of tokenomics matters, a token's price collapses if no one wants to buy it. After all, it needs two parties to make a sale; a buyer and a seller.
If no one wants to buy the token, the price will drop because there are too many sellers. If the price falls too much, the project will not be successful. Some protocols do not focus enough on the part of the token that encourages people to buy and use it.
The incentive function is crucial because it helps drive demand for the token. It can be linked to different things, like the ability to make decisions about the protocol, getting a return on your investment, or using certain services. E.g., Curve Finance
Questions to ask when doing a demand-side analysis include:
What is the purpose of the token in the project's ecosystem?
Who are the target users of the token?
How does the token fit into the overall business model of the project?
What is the total supply of the token and its distribution plan.?
Are there any partnerships or collaborations that may drive demand for the token?
Takeaway
If a coin is in short supply or if its demand is high, the situation increases in price. Those who wish to buy it are willing to compete by offering higher prices. Alternatively, if a cryptocurrency is abundant and its demand is low, the prices fall.
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