Why Is Tokenomics Important When Investing in Cryptocurrency?
In his famous investment book, Margin of Safety, value investing legend Seth Klarman explains that, “In the short run supply and demand alone determine market prices.” If we believe that to be true and that it applies to cryptoassets using blockchain technology as well as the stock market, then understanding the factors that will impact either supply or demand are of vital importance to both speculators and investors.
In which case, there are a number of factors to consider when looking at crypto tokenomics. Perhaps the most important is to understand how the digital currency will be used. Is there a clear link between usage of the platform or service being built and the asset? If there is, there is a strong chance that a growing service will require purchases and usage that ultimately helps to increase the price. If there is not, what can the token be used for?
Other important questions to answer include the following:
Tokenomics is also helpful as guidance to understand how much an asset might be worth in the future. For example, many people new to crypto will think something like, “If this coin becomes as valuable as Bitcoin, then one day…” while in reality it might never be possible.
As an example, let’s think of two coins mentioned above, Bitcoin Cash and Tron. Bitcoin Cash has the same total supply as Bitcoin, so thinking that one may become as valuable as the other in time has some legitimacy — it is possible.
However, with more than 100 billion Tron existing, for one coin to be valued in the thousands of dollars, Tron would need to become the most valuable business in the history of the world — how likely is that to happen?
While these questions may seem to require complex answers, they will provide an extra way to view cryptoassets and help to understand whether one asset is more likely to have a great future than another.