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Ask CryptoVantage: What Are Tokenomics? Why Do They Matter?

One of the most common questions I get, or things I hear when talking to people new to cryptocurrency, is how come X token is this price but Bitcoin is this much, or Ethereum is that much? Can X token be worth as much as Y? I see this one is only 5 cents should I buy it?

These questions bring about a very important discussion within the digital asset world: tokenomics or token economics. In this edition of Ask CryptoVantage we will be looking at tokenomics, or in essence, supply and demand, their effect on a crypto market cap and their individual prices, and why it is relevant if you are looking to invest.

The global cryptocurrency market is dizzyingly diverse with plenty of different factors to consider.

Market Cap and Circulating Supply

Market Capitalization, or Market Cap, is the total price of an asset as a whole, which is based on the circulating supply of that asset. Bitcoin, for example, currently has a circulating supply of about 18.6 million BTC, but its max supply is 21 million, so its market cap will increase as the rest of the supply Bitcoin is mined.

In contrast, Cardano (ADA) currently has a circulating supply of about 31 billion, and a max supply of 45 billion, meaning that when both are at max supply there will be 2,100x ADA compared to BTC (more when you consider the BTC locked in wallets that private keys were lost too). So, when you look at the price of ADA compared to BTC it is important to remember the difference in supply.

One of the most attractive things about cryptocurrency to those who invest in it, is the knowledge of a max supply, which is not something that exists with fiat currency which is able to be printed endlessly and results in the inflation we are seeing year to year.

Tokenomics: Why Tokens Have Value

The value of cryptocurrencies is then derived from a combination of supply, and demand due to utility and scarcity. Bitcoin is considered a provably scarce store of value, with a relatively small supply, and this creates demand and value. Not only that, but it is known exactly when and how much new Bitcoin will enter the system, which is not true of currencies such as the United States Dollar.

Ethereum derives a lot of its value by being necessary to pay for all transactions on the Ethereum blockchain because of gas fees, though this is currently an unsustainable process that is costing users a lot of money in transaction fees.

Similarly, Binance Coin (BNB) is valuable because holding it means you reduce your trading fees on Binance Exchange, and a they burn a portion of tokens each quarter, meaning the tokens that remain are more scare and thus more valuable. Because Binance has the most volume of any exchange the incentive to reduce trading fees is high. You can also use BNB across 130 trading pairs on Binance in addition to being able to use them to receive new token drops. More and more merchants now accept BNB as a payment method, further increasing its utility.

Crypto.com Coin (CRO) offers similar advantages to BNB on the Crypto.com Exchange in addition to being stakable for a 10% annual interest return, or for a crypto debit card that offers incentives such as rebates on your Spotify and Netflix payments.

Staking is another way tokens create value for themselves, CRO, Polkadot (DOT) and Cardano are all examples of cryptocurrencies that you can stake, and they return users more attractive interest rates than any traditional financial institution can. In this scenario users are being rewarded for securing the network with their CRO, DOT or ADA. Transactions on these networks are also payable in the native token, furthering their value. If something such as smart contracts become deployable on these networks the same way as they are on Ethereum that would further increase their value.

Tokenomics and Their Importance in Crypto Investing

Essentially, the more useful AND scare a token is, the more valuable it can become. People like to compare Cardano and Ethereum because they are competing concepts, but it is important to remember there is only a little under 115 million ETH circulating compared to more than 31 billion ADA. In order for the price to be comparable apples to apples the supply needs to be the same.

That being said, there is a bit of psychology when looking at investing and thinking you can get a fraction of this one asset but a few hundred of this other one for the same price. This is a mistake. You need to dig into an assets tokenomics before investing in it, decide whether you like how the project plans to create value for their asset, and whether it is going to be sustainable in the long run.

So, when looking to invest in cryptocurrencies it is important to consider tokenomics; the amount of an asset there is, how its used, how it can generate value, and its distribution (or burn) mechanism, along with the scope of the project itself. These factors combined will help you determine if an asset is overvalued, undervalued, and whether it might be a something you want to invest in.

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About the Author

Evan Jones

Evan Jones was introduced to cryptocurrency by fellow CryptoVantage contributor Keegan Francis in 2017 and was immediately intrigued by the use cases of many Ethereum-based cryptos. He bought his first hardware wallet shortly thereafter. He has a keen and vested interest in cryptos involving decentralized backend exchanges, payment processing, and power-sharing.