What indicators should you look at before investing?
A strong token economics can help a token achieve a hundredfold growth within a year, while poor token economics can lead to a 90% drop in value. Understanding token economics is the most crucial skill in the cryptocurrency field. Without a grasp of token economics, it’s difficult to make successful investments. Learning is essential, and blind trading can lead to losses. Cryptocurrency KOL cyclop has provided an overview of token economics, and here is a comprehensive guide to understanding token economics.
When you first come across a potential token, such as on CMC, you will see the following information:
– Market Cap (MC)
– Total Supply
– Circulating Supply
– Fully Diluted Value (FDV)
These are the basic supply indicators:
– Circulating Supply: The current tokens in circulation
– Total Supply: The total number of tokens that can exist
– MC: The total value of the circulating supply in USD
– FDV: The total value of the total supply in USD
Understanding these indicators allows you to evaluate the potential of a token. But to do so, you need to understand more than just the nominal concepts. You also need to understand how they work and how they affect the price.
Let’s start with the supply. Tokens can follow two paths:
– Inflationary
– Deflationary
Inflationary tokens: The supply of tokens can increase, which is called inflation. Inflation is a negative factor as it usually leads to a decrease in value. However, if the inflation rate is slow and the quantity is small, it may not have a significant impact on the value.
Deflationary tokens: The supply of tokens decreases over time. This happens when a project buys back and burns tokens. In theory, reducing the supply should increase the value, but this is only theoretical.
Now let’s discuss the main factors that determine token issuance and lifespan: allocation and distribution.
There are two methods:
– Pre-mining (allocation among early investors, team, advisors, etc.)
– Fair distribution (equal purchasing opportunities for everyone)
Most projects adopt the pre-mining method.
Why is this method important?
If the TGE is 100% and 50% of the tokens are allocated to investors, investors can sell off their tokens at any time, and retail investors may become the ones left holding illiquid assets. That’s why you need to understand:
– TGE allocation
– Vesting (token lock-up)
– Cliff (waiting period before vesting)
Token distribution usually involves the following recipient types:
– Private sale (investors, KOLs, etc.)
– Public sale (retail investors)
– Marketing
– Ecosystem (equity, rewards, etc.)
– Airdrop
How do they sell tokens?
The day of token issuance is called TGE (Token Generation Event).
TGE allocation is the percentage of tokens allocated to all the individuals mentioned above (10-20%).
Cliff is the period between TGE and the next vesting period.
Vesting refers to gradually releasing a certain percentage of tokens each month.
Recently, some projects have adopted a lower TGE percentage (up to 20%), followed by several months of cliff and vesting periods of 12 months or more. This method is more suitable for long-term project success, so it’s important to verify all these details before investing.
Another key factor for any token’s success nowadays is demand. That’s why projects incentivize retail investors to buy specific tokens. For example, despite severe inflation, people still buy USD because they need it for their daily lives.
In general, there are four factors that drive demand for tokens:
– Store of value
– Community-driven
– Utility effect
– Value accumulation
Store of value:
Cryptocurrencies can serve as a store of value. Many people buy cryptocurrencies simply to store money, such as Bitcoin, which is often compared to gold.
Community-driven:
As this current cycle has shown, the community can strongly drive demand. The rise of memecoins is entirely due to the community. People buy things they believe can make them money.
Utility effect:
Demand is stimulated when holding tokens can provide some utility. For example, you need a certain token for staking or participating in a network.
Value accumulation:
Incentivizing equity holders:
People also want tokens to provide some value. That’s where staking comes in. You can lock up tokens to earn rewards regularly. This benefits all parties involved and has relatively low risk.
Value accumulation:
Incentivizing holders:
Another option is holding. Project teams often provide rewards/airdrops to holders, which benefits everyone. There are many ways to reduce selling pressure through holding:
VeToken:
You can earn VeToken by holding tokens.
“Ve” stands for Voting Escrow, meaning that by locking up your tokens, you gain voting rights.
The longer you hold, the greater your accumulated voting power.
Mining:
Holding tokens can also increase your mining efficiency.
The more tokens you hold, the higher the growth rate of your returns.
Additionally, it’s important to understand who is holding the tokens, regardless of how high the demand is. Is it a strong community or dumpers? Figuring this out can be more challenging. You need to engage with the project’s community and analyze it.
Furthermore, even with poor token economics, tokens can still have the potential to rise, and vice versa. Always consider this possibility. Here is a checklist of things to check before investing:
– Total supply and circulating supply
– Allocation and distribution
– Lock-up period/unlock dates
– Percentage of token release
– Demand
By analyzing these factors, you can essentially determine whether the project is worth investing in.
This article is a collaboration and was originally published on PANews.