2017 proved to be a big year for the cryptocurrency. For one, a vast number of cryptocurrencies reached all-time highs in price. More importantly, however, more people had been introduced to the world of crypto and blockchain technology. While many people jumped ship merely for making quick money, it’s clear that cryptocurrencies have a real shot at revolutionizing how we do our daily transactions. Crypto can be used to tokenize assets, represent ownership, and allow holders to turn into active participants of decentralized networks.
All this has led to the creation of new economic models surrounding digital assets, now referred to as token economics. Since the industry is relatively young, it can be difficult for even somebody with a degree in economics to understand how these new models work fully. Cryptocurrency investing programs such as Bitcoin Trader have made it easier to buy and sell different coins but using these tools while leveraging your knowledge about how cryptocurrencies work will help you gain higher ROI. Having a deeper understanding of the token economics behind each cryptocurrency can help you become a wiser investor as it provides useful insight about what the digital coin is for and where it’s headed in the future.
The Basics of Token Economics
Before the launch of a cryptocurrency, the models for its particular token economy must be designed and implemented. For most cryptocurrency projects, the process starts with choosing the consensus model. But an increasing number of cryptocurrencies are continuously created using consensus algorithms. Bitcoin and Ethereum are prime examples, using the Proof-of-Work model in which miners verify transactions and secure the network by solving blocks. For each block solved, the miners earn their rightful reward.
Cryptocurrencies like Dash, meanwhile, operate under the Proof-of-Stake algorithm. This model rewards native cryptocurrency holders by merely keeping their tokens in a wallet. By staking their holdings in a wallet, they have the opportunity to solve blocks, and thus earn new tokens.
These consensus models offer rewards to all participants, which then causes inflation. As supply increases, the value of the token decreases, assuming that the demand for it remains the same. This explains why each token implements its own set of rules to deal with inflation, In Bitcoin’s case, the miner gets 12.5 Bitcoin for solving one block. But in 2021, this will be halved to 6.25 Bitcoin. This pattern will continue until all circulating supply of Bitcoin is mined.
The Importance of Token Economics
When you’re planning to put your money into any cryptocurrency project, you should ask yourself: what is the purpose behind this cryptocurrency? You can get the answer to this question by understanding the token economics behind that particular digital token.
One red flag to watch out for is when a newly-issued cryptocurrency doesn’t seem to have any purpose other than raising funds. This is the biggest problem surrounding ICOs. Many people have profited from them, but many have also lost a boatload of money. It’s critical to look beyond the promises of the makers and focus on the technology running the crypto, the credibility of the team members, and their development plans for the future.
You should understand that any cryptocurrency that’s only meant to attract funds will see a decrease in demand over time. The same goes for tokens meant for profit-sharing. These digital assets will have a difficult time competing against other cryptocurrencies that serve a variety of purposes, thus creating several reasons to increase in demand. Finding practical use cases for the cryptocurrency you’re interested in is always a winning strategy, especially if you’re planning to grow your earnings over the long term.
