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Understanding Tokenomics for Better Investing
Tokenomics, a combination of “token” and “economics,” refers to the study and analysis of various metrics related to a crypto project. By understanding tokenomics, you can make more informed investing decisions. It involves analyzing factors such as market cap, token supply, emission rate, and other measurable metrics.
The Importance of Supply-Side Tokenomics
To understand tokenomics better, it’s essential to grasp three key supply numbers: circulating supply, total supply, and max supply. These numbers can help you make rough calculations when evaluating potential investments.
Circulating Supply: This refers to the number of tokens available for trading at any given time. Some projects see their circulating supply decrease over time due to intentional token burning.
Max Supply: This represents the total number of tokens that can exist for a specific cryptocurrency. Some projects have no max supply, which means new tokens will continue to be created.
Total Supply: This metric takes into account the total number of tokens created minus the tokens that have been permanently removed from circulation through burning. The total supply can differ from both the max and circulating supplies.
Connecting Supply Metrics with Market Cap Analysis
Understanding these supply metrics is crucial in analyzing market cap and fully-diluted market cap. Market cap is calculated by multiplying the current price per token by the circulating supply. Fully-diluted market cap considers the max supply instead.
Price Movement and Market Cap
Price movement directly affects market cap. Even if the price remains static, an increase in token issuance would raise the market cap. Likewise, if the price appreciates, it would lead to a higher market cap.
Considering Circulating Supply and Max Supply
Projects with a smaller difference between circulating supply and max supply are more appealing to investors. For example, Bitcoin’s circulating supply is approaching its max supply, making it easier to calculate price movement and potentially attracting more investment.
On the other hand, projects with a significant delta between circulating supply and max supply require sustained demand to maintain or increase token prices.
Setting Realistic Expectations
When predicting future price movements, it’s important to calculate how that would affect the current market cap. Unrealistic predictions can be brought back to reality by understanding the relationship between price and market cap.
For example, if someone predicts Dogecoin will reach $5 in the next decade, it would result in a market cap of $700 trillion, which is highly unlikely given its current price and circulating supply.
Hot Take: Understanding tokenomics is crucial for crypto investors as it helps make informed decisions. By analyzing metrics like market cap, token supply, and emission rate, you can gain a better understanding of a project’s potential. It’s also important to consider the interplay between circulating supply and max supply when evaluating investments. Realistic expectations are essential to avoid unrealistic predictions about future price movements.
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