Understanding the value of a cryptocurrency
by Maryna Trifonova, Head of Content at Jax.Network
Bear market is a perfect time to build up a long-term investment portfolio for the future bull run. Thus, it’s crucial to dedicate considerable time to researching and appraising projects that have the potential to increase in value enormously within the next couple of years. In this article, we would like to give basic recommendations for evaluating the tokenomics of any cryptocurrency project.
Why is tokenomics important?
As every living being in this world is driven by an incentive, every cryptocurrency project is powered by tokenomics. In simple words, tokenomics is a study that refers to the economic principles and design decisions that govern the creation, distribution, and use of tokens within a blockchain-based network. It is vital for all investors to do an in-depth analysis of a coin prior to making an actual investment. So tokenomics becomes the first document you should look for. As a rule, tokenomics can be found in the whitepaper. It describes the main provisions of coin supply, including allocation, vesting period, and emission, along with governance principles. Why is it important?
First and foremost, tokenomics is the primary source of knowledge that gives you an understanding of how the supply and demand curve works out for this particular coin and how it shapes the future value of the coin. This knowledge is useful for determining the potential price movement and building a good exit strategy, considering scarcity and sell pressure points. Without a deep study of tokenomics, the risk of losing everything to a scam is relatively high. Always do your own research and stay away from suspicious projects, regardless of what popular bloggers say.
Key takeaways
Let’s take the tokenomics of Jax.Network as an example of appraising a cryptocurrency. And it becomes interesting from the first seconds, as Jax.Network is a two-coin network, which separates investment motives from transactional motives. Thus, JXN serves as a utility coin representing the ecosystem value, while JAX is purely transactional. Such a design helps to mitigate money bubbles that the crypto sphere has in abundance.
The next thing we should pay attention to is supply. While the supply of both coins is unlimited, there’s a catch. JXN has a pre-mine of around 40 million tokens, 4 million of which were already burnt by the team. The rest will be diluted 100% in the next 5 years. After which, the issuance of JXN coins will drop to 1 million per year in perpetuity. In addition, newly mined tokens are limited to 270 JXN, with 250 JXN being locked for approximately 9 months. It means that the supply is under control, but one needs to keep in mind that locked coins will eventually get released to the open market.
It’s also important to assess the token distribution chart in order to understand who owns what and whether there’s no concentration of too many tokens in single hands. The token distribution of Jax.Network, which is depicted below, is a good illustration of how coins should be distributed between ecosystem participants. It also helps to determine sources of selling pressure and potential sell waves, if there’s any vesting period.
Token incentives go hand in hand with utility and basically determine why anyone would want to buy and hold a coin. In the case of JAX (WJAX), everything is quite simple: it’s a stablecoin created for everyday transactions, and users will be able to swap it on Jax.Money for localized derivatives at a better exchange rate, providing an arbitrage opportunity. As for JXN (WJXN), we have a wide range of different incentives, which we have already described here and here.
A different perspective
It’s interesting to point out that the study On the Value of Virtual Currencies published in Journal of Money, Credit and Banking posits a bit different view on the matter. It posits that three main aspects make up the exchange rate of a cryptocurrency:
- the current value of a digital currency engaged in real transactions;
- the decision and expectations of investors for the future regarding buying a cryptocurrency (thus regulating its supply);
- and the things that help to shape future adoption of the virtual currency by consumers and merchants.
Thus, the study concludes that the value of a coin or its exchange rate, to be more precise, gets less prone to shocks created by speculators with the increase in adoption, despite the high volatility that everyone sees as a major obstacle. However, we should remember that not enough data is available on the actual number of transactions carried out in this or that virtual currency. Detailed statistics on usage and adoption rates will help to provide better input for establishing the value of a cryptocurrency.
Conclusion
While tokenomics plays an important role in evaluating a cryptocurrency, investors should remember that it’s not the only parameter. It’s recommended to include the use case, team, marketing, and many other aspects in your analysis in order to get the full picture that will help you make the investment decision.
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