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When you buy tokens from the supply, the token's price can increase depending on the tokenomics and the market model of the cryptocurrency. Here's how it works:
1. Market Dynamics (Demand and Supply)
When you purchase tokens, the demand increases, and the circulating supply in the market decreases. This creates upward pressure on the price, especially if there are limited tokens available.
In automated market maker (AMM) models like those used in decentralized exchanges (e.g., Uniswap), token prices are adjusted algorithmically based on the liquidity pool balance.
2. Automated Market Maker (AMM) Formula
ā¢ AMMs use a formula, typically x.y=k, where:
x and y are the amounts of two tokens in the pool.
k is a constant.
When you buy a token, you remove it from the liquidity pool, reducing its supply (x) and increasing the price because k must remain constant.
3. Burn Mechanisms
ā¢ If the project has a burn mechanism, a portion of the tokens purchased might be burned (removed from circulation), reducing total supply, which can increase the token's price.
4. Staking or Lockup
If tokens are staked or locked up after purchase, the circulating supply is reduced, potentially driving prices higher if demand remains constant or increases.
5. Speculation and Market Psychology
Large purchases can signal confidence in the project, encouraging other traders to buy, which increases demand and raises the price further.
Example:
If your token operates with an AMM model and someone buys from the liquidity pool:
Before purchase: 1 TREX $0.50
ā¢ After purchase: The amount of TREX in the pool decreases, and the AMM adjusts the price to maintain balance, resulting in a new price like 1 TREX = $0.55
For more information let me know in the comments.
