You would not buy a company you don't understand, so never buy a token you don't understand!!!
13 June 2022: I am intentionally capturing the date on this article, so that those who read it in years to come can witness how we never stopped learning in 2022 during the Great Depression of Cryptocurrencies. We continued to study the tokens and buying even though it hurts. I am relentless in buying assets I love at discounted prices, so with my Full Disclaimer out of the way, LETS GO!!!
Many people invest into cryptocurrencies without understanding the Tokenomics of a coin/token. That is exactly like investing into a stock without understanding the business model. Warren Buffett would not be happy. So, lets first understand what exactly Tokenomics is before I break down the tokenomics of a few tokens over the next few weeks and months.
The term Tokenomics is a combination of token and economics, and its meaning is quite similar to economics. Tokenomics studies how people interact with tokens. Focus should be on the
- Distribution, and
- Burning of tokens of a cryptocurrency
Economics is divided into micro- and macro-economics. Macroeconomics is the study of the larger economy. Microeconomics is the study of a business or individuals. Tokenomics thus refer to microeconomics, as we study a token and not the economy.
The rules of Tokenomics are implemented through code and are quite difficult to change as they require agreement from many network participants. Because of these decentralized agreement protocols, cryptocurrencies are often more predictable than their central bank-issued counterparts, fiat.
The design aspects of tokenomics are:
- How tokens are created
- How tokens are brought into circulation
- How they are removed from circulation
- Incentives play a big role in this process too. How do you get network participants to do what you want them to? If you want transactions to be added to the blockchain, you will need to pay miners to include them. If you want people to stake their tokens and validate the network, you will have to pay a fee to them. The design aims to direct how people interact within the network.
Why you must understand Tokenomics
If you are thinking about putting your hard-earned and taxed fiat into a digital coin, it would be good to understand a few basics. There are many different cryptocurrencies to choose from and understanding the tokenomics will help you make an informed decision.
Key points to look into are:
- What number of coins exist and how many more will be added?
- Is the supply inflationary (increasing) or deflationary (decreasing)?
- Do the coins have utility i.e. can they be used for something other than exchange?
- Whats is the specific use case? What does the coin make possible on the internet or in real life? Does the token solve a problem?
- Where does the token fit into the puzzle that is cryptocurrencies?
- Who owns the majority of coins? Is it well spread out or concentrated in a handful of accounts?
Studying tokens is inherently harder than studying a tangible business but understanding the Use Case as well as the Supply and Demand of tokens will help you form an investment thesis.
Amazing Resources where you can study Tokenomics for free: