The importance of token economics cannot be ignored: good token economics can make a token gain up to +10,000% in a year, while bad token economics can cause a loss of up to -90% in a year. In this article, I will share how to analyze different token economics to help you make smart investment decisions.
Today, I want to discuss a crucial topic that could save you hundreds or even thousands of dollars in losses. Learn from the mistakes of others. Before I understood how token economics really worked, I made some terrible investments that are still down 80% today.
Without understanding the token economics, any purchase is just a gamble on price fluctuations. Therefore, please avoid blindly trading, otherwise you may face serious losses!
When evaluating a potential investment, you’ll see the following on the token page:
- Market Cap
- Fully Diluted Value
- Circulating Supply
- Total Supply
Each metric is critical to making informed decisions. Here are the specific roles of these metrics:
- Market Cap (MC): USD value of circulating supply
- Fully Diluted Valuation (FDV): USD value of total supply
- Circulating Supply: The number of tokens currently circulating in the market
- Total Supply: The total number of all tokens that may exist
There are three main factors that determine the success of a token:
I. Token Distribution
There are two ways to distribute tokens:
1. Pre-Mined: distributed among early supporters, team and advisors
2. Fair Launch: Everyone has equal opportunity to buy
In the current market, most tokens are pre-mined. If 50% of the tokens are allocated to investors and there is a 100% Token Generation Event (TGE), investors may sell the tokens, causing you to exit liquidity. Therefore, it is very important to understand the following:
- Token Generation Event (TGE) Allocation
- Cliff period
- Vesting period
The Token Generation Event (TGE) marks the official issuance of tokens. TGE allocation refers to the proportion of tokens allocated to individuals, usually between 10-20%. The unlock period is the initial period after the TGE, which serves as a pause before the subsequent lock-up begins. The lock-up period refers to the process of gradually distributing tokens on a monthly basis.
II. Token Distribution
Common allocation recipients include:
- Airdrop
- Marketing
- Public sale
- Private sale
- Ecosystem
Recently, projects have adopted a strategy of a modest TGE (no more than 20%), followed by an unlocking period of several months, and a lockup of more than a year. This approach is more suitable for long-term project success. It is important to verify these details before investing.
III. Requirements
As with any coin, demand is key to its prosperity. Demand drives buyer interest. Consider the US dollar, even though it faces significant inflation, people still buy it because it is a daily necessity.
Generally speaking, token demand is driven by four factors:
1. Community Support
2. Store of Value
3. Utility of Tokens
4. Value creation
Furthermore, no matter how high the demand is, it is also important to understand who holds the asset. Is it a strong community or speculators? This requires you to interact with the project community and analyze carefully, but it is definitely worth it.
Summarize:
Even if the token economics are not ideal, the token may still surge, and vice versa. Keep this in mind! Welcome to the world of cryptocurrency, where even the most ridiculous scenarios can come true.
