What are the key indicators that investors should pay attention to? Learn about token economics in one article

What are the key indicators that investors need to pay attention to? Learn about token economics in one article! Tokenomics is a combination of two words: Token and Economics. It covers aspects such as token issuance, supply, distribution and liquidity provision. Understanding token economics is one of the most important skills in the crypto field. If you don’t have a deep understanding of the token economics of a project, you can only be influenced by the market or follow the trend of investment, which often makes it difficult to achieve investment success.

So what are the key indicators that investors need to pay attention to? Are there any gameplay tips for token economics? Below, the editor of this website will give you a detailed introduction to the gameplay skills of token economics. Friends who need it can take a look together!

Understand the importance of tokenomics

A project’s tokenomics shows potential investors that the developers of that cryptocurrency have built a strong ecosystem for it. Well-constructed token economics mean that over time, demand for such digital assets will increase exponentially, and investors will have the potential to generate significant returns on their investment.

Investors delve into token economics to discern whether cryptocurrencies have sustainable economic models. Thoughtful token economics are critical to the longevity and success of crypto projects, and can significantly impact a cryptocurrency’s appeal and value to investors. For example, a poorly designed economic model can lead to inflation if supply far exceeds demand, making the value of the token decrease over time.

Indicators that investors need to pay attention to

1. Market Cap

Market Cap is the total value of all circulating tokens in the current market. It is an important metric for assessing a token’s market size and potential growth.

2. Fully Diluted Value

FDV refers to the total value of all tokens (including unissued tokens). It helps investors understand the token’s full potential and future market size.

3. Circulation and Total Supply

Circulation is the number of tokens actually circulating in the current market, while total supply is the maximum number of tokens set when the project was created. These two figures help investors evaluate the scarcity and potential growth of a token. For example, there will always be only 21,000,000 Bitcoins, and its current circulating supply is 19,719,000.

4. Inflation and Deflation

Understanding whether a token is inflationary or deflationary is crucial to assessing its long-term value. Inflationary tokens may decrease in value due to an increase in supply, while deflationary tokens may increase in value due to a decrease in supply. For example, Bitcoin issuance is halved every four years or so, and halving introduces a deflationary mechanism into Bitcoin’s economic model.

5. Allocation and Distribution Mechanism

The allocation and distribution mechanism of tokens, such as pre-mining and fair issuance, directly affects the liquidity and price stability of tokens in the market. Understanding the allocation of tokens, especially the Vesting and Cliff periods, can help investors assess market risks.

The Role of Tokenomics in Investment Decisions

Tokenomics is crucial because traditional asset valuation methods (such as those of stocks or bonds) cannot be directly applied in the cryptocurrency world. Each cryptocurrency has a unique set of rules involving supply, issuance, and other technical factors. Therefore, token economics is something that investors must study before making investment decisions.

By delving into token economics, investors can better understand the sustainability and potential value of a project, allowing them to make more informed investment decisions.

The following is a complete Chinese guide on token economics compiled by the editor based on the tweets of crypto KOL Cyclop on social media X.

Initial understanding of tokens

When you first start researching a potential token, such as on the currency market of Bijie.com, you will see the following:

• Market Cap (MC): All currently on the market The total value of circulating tokens.
• Total Supply: The total amount of tokens that can exist.
• Circulation volume: The number of tokens actually circulating in the current market.
• Fully Diluted Value (FDV): The total value of all tokens (including unissued tokens).

Understanding these basic supply metrics can help you evaluate a coin’s potential. But to do this, you need to have a deep understanding of how they work and their impact on price.

Supply Types

Tokens have two supply paths:

• Inflation: Token supply can increase, which is called a release. This usually results in a decrease in the value of the token, but if the release is slower and in smaller quantities, the impact may not be significant.
• Deflation: Token supply decreases over time. This happens when a project buys back tokens and burns them. In theory, reducing supply should increase value, but that's just theory.

Allocation and Distribution

The main factor that determines the issuance and lifespan of a token is the method of allocation and distribution. There are two main methods:

• Premine: distributed among early investors, teams, advisors, etc.
• Fair distribution: everyone has equal purchasing qualifications.

Most projects adopt the pre-mining method. The key to this method is to understand the distribution and unlocking of tokens.

Important Metrics

• TGE (the day the token is issued) Allocation: Percentage of tokens allocated to all individuals listed above (10-20%).
• Cliff (cliff period): the period after TGE and before the next Vesting (token locking period).
• Vesting (Token Locking): A certain proportion of tokens will be gradually released every month.

Token distribution usually has the following reception types:

• Private sale (investors, KOL, etc.)
• Public sale (retail investors)
• Marketing
• Ecosystem (stakes, rewards, etc.)
• Airdrop

How do they sell tokens?

If TGE is 100% and 50% of the tokens are allocated to investors, then investors can sell tokens at any time, and retail investors may become the takers of exit liquidity.

Recently, some projects have adopted a method with a smaller TGE percentage (up to 20%), followed by a few months of cliff and more than 12 months of vesting. This approach is better suited for the long-term success of the project, so it is very important to verify all these details before investing.

Another key factor for any coin to be successful today is demand. This is why projects incentivize retail investors to purchase specific tokens. For example, despite severe inflation, people still buy dollars because they need it to live.

Demand Driven

For any coin to be successful, demand is the key factor. The following four factors can drive demand for tokens:

• Store of Value: Cryptocurrencies can serve as a store of value, such as Bitcoin, which is often compared to "digital gold."
• Community-driven: The power of the community can strongly drive demand, and the rise of Meme tokens is an example.
• Utility Effect: Demand is stimulated when holding a token provides some utility, such as staking a token.
• Value accumulation: Encourage long-term holding of tokens by rewarding equity holders.

To incentivize holders, there are multiple ways to reduce selling pressure:

VeToken

Earn VeToken by holding tokens, "Ve" stands for voting escrow. The longer the holding time, the greater the accumulated voting rights and the ability to influence project decisions.

Mining

The more you hold, the higher the mining efficiency will be. Token holders can increase their yield by locking up their positions.

Key Checks Before Investing

Before investing, the following points need to be analyzed in detail:

• Total Supply and Circulating Supply: Understand the scarcity of the token.
• Allocation and distribution: Make sure the allocation method is reasonable and avoid concentrated holdings.
• Lockup Period/Unlock Date: Find out when the token will enter the market.
• % Release: Analyze the number of tokens unlocked each time.
• Demand: Assess the market demand for the token.

Through such analysis, you can better determine whether this project is worth investing in. Although projects with poor token economics may also rise, and projects with good token economics may also fall, such an analysis can significantly improve your investment success rate.

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