By James Davis
Many investors inject funds into a particular crypto project based on its roadmap. But did you know understanding the tokenomics of a crypto asset enables you to make better decisions when it comes to investing? In this article, we will discuss everything you need to know about tokenomics and how to use the concept in your investing journey.
Tokenomics is a combination of two words: token and economics. It involves analyzing a token’s market cap and supply.
Supply Tokenomics
A token supply is categorized into three: Maximum supply, circulating supply, and total supply.
Circulating Supply
This represents the number of tokens available for trading. Most crypto projects start with a small circulating supply and then increase it gradually. However, there are other projects that reduce their circulating supply over time through what’s known as burning. For instance, Ethereum regularly burns transaction fees to lower the circulating supply, boosting the ETH price.
Maximum Supply
This is the total number of coins that can ever exist for a particular crypto asset. For instance, the maximum supply of Bitcoin is capped at 21 million. Its circulating supply is 19.45 million as of this writing. New coins (6.25 BTC) are added to the supply every ten minutes. When the maximum supply is reached, no other Bitcoin will be added to the circulating supply.
It is worth mentioning that there are crypto assets with no maximum supply. A perfect example is Dogecoin, a well-known memecoin. Moreover, most stablecoins pegged to USD do not have a maximum supply.
Total Supply
To get the total supply of a token, you need to subtract the number of coins burned from the number of coins created. Although a token’s total supply is different from circulating and maximum supplies, it often matches either the circulating supply or maximum supply (but not both).
For instance, if you head to CoinMarketCap or CoinGecko, you will realize that the total supplies of cryptocurrencies like Bitcoin, Bitcoin Cash, and Ethereum match their circulating supplies. Other crypto assets like Lido Dao and ApeCoin have matching total and maximum supplies.
Connection Between Token Supply and Market Cap
Token supply has a massive effect on market capitalization and fully-diluted market capitalization. To determine a token’s market cap, you multiply the token’s current price by the circulating supply. For instance, Bitcoin trades at $34,300, and its circulating supply stands at 19.45 million. So, you multiply the two figures to get $667.13 billion, which is the current BTC’s market cap.
Note that this market cap grows when more Bitcoins are added to the supply or the coin’s price appreciates.
So, how do you calculate the fully-diluted market cap? Simply multiply the maximum supply by the token’s market price. As for Bitcoin, you can do this maths (21,000,000 x 34,300) to get its fully-diluted market cap. If your answer is $720.3 billion, you are correct.
Crypto assets with standard market caps and fully-diluted market caps that are closer to each other tend to attract investors since it is easy to calculate the token’s price movement.
How Tokenomics Helps You Make Realistic Price Predictions
Understanding the concept of tokenomics helps you to forecast realistic future prices. For example, you google DOGE and find an article stating that the memecoin will hit $5 in ten years. You can use its tokenomics to determine if that’s possible. Here is how to go about it: DOGE is now valued at $0.07, with a market cap of nearly $9.2 billion. It has a circulating supply of 141 billion. If you multiply the circulating supply (141 billion) by the predicted price ($5), you get $705 trillion. Now, this is an unrealistic figure, considering that the market capitalization of the world stands at $117 trillion. Moreover, since more Dogecoins are being added to the supply every minute, thus reducing the memecoin’s value, it is likely that the token would even struggle to reach $1 over the next decade.
Tokenomics Resources
As mentioned, you can visit CoinGecko and CoinMarketCap to access tokenomic data. In addition, popular cryptocurrency exchanges like Binance, Kraken, and Coinbase offer users access to such helpful information.