To put it simply, Cryptocurrencies tokenomics is the understanding of the demand and supply mechanism associated with cryptocurrencies. 

In the conventional economy, economists make use of money supply information to monitor currency issuance. The numbers contained in this information are referred to as M1 (most liquid form of money) and M2 (slightly less liquid forms of money). These numbers make it easy to monitor the various aspects of money supply. 

Money supply information is important because, throughout history, rulers have habitually created additional currency in their territories or countries. As you would expect, running countries or fighting wars does not come cheap, and it was not always easy for rulers to balance budgets or raise revenue through more organic ways. Hence, they had no option but to produce more currency. 

In today’s world, pandemic responses or bank bailouts have compelled governments to print more money and in very quick fashion. 

Even though governments oversee the process of currency creation, creating too much currency too quickly can reduce the demand (and therefore, value) of the money currently in circulation. This drop in value is referred to as ‘inflation’, and is visible in the increase in commodity prices that we experience with each passing year. 

What Does this Have to Do with Tokenomics or Cryptocurrencies?

Tokens and cryptocurrencies are developed using blockchain technology which contains algorithmically-created, pre-set issuance schedules. These schedules allow us to predict, with reasonable accuracy, the number of coins that will have been developed by a certain point in time. Even though, theoretically, these schedules can be altered, implementing such an alteration will require approval from a lot of people and is generally very complex and difficult. 

This means that crypto owners, traders, and investors can enjoy a certain degree of comfort, as they are aware of the tokenomics for their specific coins. In other words, they can predict the degree to which their digital assets will be created in the future. These predictions are considerably accurate and far easier to make compared to those related to FIAT currencies

Importance of Cryptocurrencies Tokenomics:

According to Seth Klarman, demand and supply are the only two short-term determinants of market price. If we agree to that notion and that it applies to the world of digital assets, then a firm understanding of the supply and demand is crucial for both crypto investors as well as for speculators. 

In this case, there are several factors that need to be considered when studying cryptocurrency tokenomics. The most important of these factors is perhaps the use case of the specific crypto that we plan to invest in. Can we identify a link between the actual asset and the usage of the service or platform? If there is a link, the growth in service will increase the demand and usage for the coin, thereby leading to a boost in the currency’s price and value. 

If such a link does not exist, a few other factors can be considered to determine the crypto viability from the tokenomics point-of-view:

  • The number of tokens or coins that are currently present
  • The number of coins that will be created in the future
  • When will these coins be created
  • Who are the owners of these coins? Will the developers receive coins in the future?
  • Is there any evidence to suggest that a large proportion of the existent coins have been deleted, burned, lost, or unusable in some other way?

Wrapping Up – The Role of Tokenomics in Determining Cryptocurrency Value:

Tokenomics helps us realistically predict the future value of a digital asset. For instance, people might feel that a new cryptocurrency will become as big and valuable as Bitcoin. However, upon conducting the tokenomics analysis for that new coin, these people realize that they were just indulging in wishful thinking, and that it is impossible for the coin to reach the heights attained by Bitcoin. 

To make this example more realistic, let us consider a cryptocurrency called Tron. Currently, Tron has more than 100 million coins in existence. For a single Tron to be worth several thousand dollars, the business behind this currency would have to become the largest corporation in the world. The probability of that happening is close to zero. 

These analyses might seem complex and confusing, but they lead to enlightening answers. Tokenomics is a useful way to assess digital currencies and predict the future of a certain coin relative to others.