How to find the Crypto Alpha? Tokenomics 101
You need to analyze projects’ tokenomics if you want to find the Alpha. What are tokenomics? To understand the concept first, we have to understand the difference between a token and a coin.
Coins:
Like native citizens, they live on their own land.
- Available on their own blockchain.
- Go through a fair launch to be mined by proof of work.
- Usually used as a reward for miners.
- Could be used to store value like gold or for purchase.
- Are used to pay for various expenses on the blockchain.
Tokens:
They’re like foreign residents with little to no voting rights compared to the natives.
- Don’t have their own blockchain. And could be available on many blockchains.
- The supply is pre-mined and uses proof of stake.
- Easier to create new tokens — no requirement to create a blockchain.
Tokenomics basics:
- Supply
- Market cap & FDV
- Token’s Allocations
- Vesting & Inflation
1. Supply
Supply plays a huge part in determining the price of a token. DOGE has a gigantic supply making the price per token very low, while BTC just has 21 million. But that’s not the only metric to look at.
2. Market cap & FDV
The lower the market cap, the more opportunities a project has. It is easier for small market caps to get an inflow of a few million, making the price go up than it is easy for Bitcoin to 10x in price.
How to calculate the market cap? Multiply the number of tokens in circulation by the current price per token.
If the full supply of tokens is in circulation, they will have a different price, which is found by the Fully Diluted Volume or FDV.
They can be found through CoinGecko or CoinMarketCap.
3. Token Allocation
Token’s Allocation can be found on the token’s website or through its blockchain explorer. When a project does a fair launch, all coins need to be mined to get your hands on them. However, with a pre-mine, token allocation is very important.
Percentages to look at in the token’s allocation distribution:
- The team
- The project’s foundation
- The venture capitalists or angel investors
- The % for proof of stake rewards
- The % for an ICO or an IEO
The higher the % of token allocations for the team, the foundation, and the VCs, the more power they have over the project, making it more centralized. The less there is for retail investors when it’s released. This centralization could also often lead to the team’s foundation selling to raise funds. This leads to a decrease in the token’s price due to the increased supply in the ecosystem.
For example, due to the heavy centralization on Solana, the network has been turned off multiple times due to hacks.
Now many projects are instead locking a big portion of tokens and releasing them in the supply over a long period of time aka a vesting schedule.
4. Vesting & Inflation
This concept was created to control greed and capital. If huge sums of pre-mined tokens are released over a short period of time that will significantly harm the token’s price.
Using the Fully Diluted Volume is the way to calculate how the increased supply will affect the price.
Tokens can be inflationary or deflationary.
Deflationary when they are burned in the cases of:
- Burning for gas fees.
- Accidentally sending tokens to the wrong addresses. (They’re out of the circulation.)
- Binance burning BNB every quarter corresponding to 20% of their profits
Decreasing the supply and increasing the demand allows the token to increase in price over the long term.
Which aspect of tokenomics would you like me to expand on?
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