Welcome to another article from Run The Chain’s Crypto Classroom. Today we’ll be discussing how to spot 100x from a loser. Getting into crypto can be intimidating. Anyone looking to invest in a cryptocurrency immediately faces a massive array of options. Whether it be established giants like Bitcoin or Ethereum, promising alt-coins like Solana or Cardano, or even meme tokens like Dogecoin or Shibu Inu, every currency has its own character and community promising that investment in it is sure to yield huge returns.
Newcomers to the space will quite reasonably question why one Bitcoin is worth $30,000 whereas one Shiba Inu is worth .002 of a cent. What determines the value of a cryptocurrency? Well, one of the most significant factors and something that every investor should consider every time they purchase a cryptocurrency is the tokenomics of the currency.
Tokenomics is a rather broad term that encompasses a few different characteristics. However, it generally describes the rules by which an asset is distributed and utilized.
The first and maybe most significant tokenomic is its supply and market cap. For example, there are currently 18,945,250 Bitcoins in circulation giving it a total market capitalization of $723.16 billion. Shibu Inu meanwhile has a circulatory supply of nearly 550 TRILLION for a total market cap of just under $12 billion.
Market cap is a far more reliable way to determine potential price rises as it shows how much money needs to flow into the coin to move the price. Shiba Inu might seem like it’s very cheap at $0.00002, especially when you hear Shibu proponents talking about the prospect of it reaching $1. However, that will require an investment of $549,063,280,000,000. About 7x the GDP of Planet Earth so that’s not going to happen!
One of the most beautiful things about a blockchain asset is that you can view the location of each coin as a matter of public record. This allows you to see exactly how many addresses the currency distributes across. Generally, the more evenly distributed an asset the better.
Many coins are sent to developers, private investors, or held as a marketing budget for the team, all before launching the token. This means that a select few wallets might hold massive amounts of the currency. This creates an artificial scarcity and if these big wallets start to sell, it can cause the price to crash. For example, one Dogecoin wallet of unknown ownership currently holds 28% of the supply. If this were to hit exchanges the effect it would have on Dogecoin’s price would be disastrous.
Almost all currencies, through one process or the other, gradually see new coins releasing onto the market day-by-day. This can be done by vesting, where investors see coins they secure pre-sale gradually releasing to them. Alternatively, you can “mine” tokens by validators of the network. It’s important for an investor to study how much, and at what rate, the supply of a currency will be subject to inflation as it will affect supply and therefore price.
However, there are also a few methods currencies use to control inflation. Some, such as Bitcoin, have a hard cap. There will never be more than 21 million BTC. Meanwhile networks like Ethereum, will send a proportion of Ether (Ethereum’s native currency) from each transaction on the network to a burn wallet, never to be accessible again. This means that Ethereum is in a constant state of balance as more Ether is mined to replace ones being lost.
The utility of a coin describes exactly what a holder of the token can do with it. Some tokens, like Bitcoin, are simply a store of value but many tokens have far more complicated use cases. You can stake some to earn rewards. You can loan others to users through smart contracts and generate an interest. The primary use case of Ether meanwhile is to pay fees on the Ethereum network meaning every decentralized app built on the network creates demand for the token.
You must consider utility when purchasing a coin. It is essentially the reason to create a coin. Assets that see genuine usage within the decentralized economy can bring massive value to their investors.
You should consider all of these tokenomic factors when making any kind of serious investment in the crypto sphere, especially for a long term investor. The crypto market is subject to a lot of hype and market sentiment can be very fickle. This can make it difficult to keep track of exactly why a currency is valuable. Consideration of tokenomics is one of the most effective ways to look past a project’s hype and see its true potential.