What is tokenomics

In classical finance, economists monitor currency output using official data on the money supply, usually denoted M1, M2, and sometimes M3 or M4 in some countries. However, an in-depth explanation of each M category can be difficult for the uninitiated. Just remember that M1 reflects the most liquid money, and M2 is less liquid, and so on... This data is important for ensuring transparency and monitoring various aspects of the supply of classical currency.

Historically, governments and monarchs have often been inclined to issue additional currency within their country. Running a government or waging war could be expensive, and it was often easier to increase the money supply. Nowadays, when crises arise, such as bank bailouts or the fight against pandemics, governments around the world are forced to quickly issue new currencies.

However, this process can lead to inflation, where a currency loses its value due to excess issuance. Inflation means that the prices of goods and services rise and our money decreases in value.

In blockchain everything is different, cryptocurrencies and tokens have predetermined release schedules and algorithms, which are usually prescribed in tokenomics. This means that the number of coins that will be created in the future can be predicted with some confidence. While changing the release schedule for most cryptocurrencies requires the consent of many people, making the process complex, it also provides greater predictability and security for cryptocurrency holders. They know that the amount of their assets will increase according to certain rules, as opposed to a situation where governments can simply push a button and print more money.

In the well-known investment book "Margin of Safety", investor Seth Klarman says that "In the short term, market prices depend only on supply and demand." If we agree with this statement and apply it to cryptocurrencies, then understanding the factors influencing supply and demand is critical for both speculators and investors.

When analyzing such assets, several factors must be taken into account. The most important thing is understanding the purposes of using a specific cryptocurrency. Is there a strong connection between the token and the use of the corresponding platform or service? If so, then the likelihood is that growing demand for the service will lead to increased demand for the purchase and use of the token, and, as a result, an increase in its price. However, if there is no such connection, then what is this token intended for?

There are other important questions that need to be answered:

Studying tokenomics usually helps answer these questions, as well as understand what the asset's price might be in the future. For example, many people who are not very familiar with cryptocurrencies may think: “If this coin becomes as valuable as Bitcoin, then wow...”. However, this idea does not always correspond to reality.

Let's look at two examples: Bitcoin Cash and TRX (Tron network). Bitcoin Cash has the same total number of coins as Bitcoin, so the idea that it could become just as valuable has some merit. But if we are talking about TRX with its more than 100 billion coins and one of them was worth thousands of dollars, then the total capitalization of the tokens must be the highest of any business in the history of mankind. How likely is this?