How do you decide whether the cryptocurrency that you want to invest in is a safe bet? This is where token metrics or “tokenomics” play their part.
In this article, we will take a deep dive into understanding what token metrics are and also look at the different indicators that can help you evaluate the health of your favored crypto asset.
So, let’s get right into the mix.
What Are Token Metrics?
Token metrics or token omics simply refer to the combination of “token” and “economy”. The technical term combines several elements such as market capitalization, token issuance, and distribution to portray the value of a particular cryptocurrency to investors.
Token metrics explore a crypto asset’s purpose, functionality, disposition, and distribution.
Why Does It Matter?
Since the crypto market is a highly volatile environment, token metrics act as a fundamental mechanism to analyze a given cryptocurrency. The metric helps decompose the chaotic movement of the market into a chain of cause and effect.
Tokenomics helps you make a sound investment decision when it comes to cryptocurrencies.
What Are The Different Types Of Token Metrics?
You can evaluate the health of crypto tokens by looking at the following metrics:
Market capitalization determines the total value of all existing tokens of a crypto project. A cryptocurrency’s market cap is calculated by multiplying its current market price by the number of tokens in circulation.
The metric also indicates how much people have invested in the token. If the market capitalization of an asset is large, its price may be stable but is unlikely to see a surge. Whereas, if the token’s market cap is small, then the asset has the potential to grow but could also be a risky investment.
The token utility can be defined as the functional value of a cryptocurrency, like what problem it tends to solve and what is its general use case. This directly affects the supply and demand, as well as the price of the asset.
Based on the utility, crypto tokens can be divided into several categories:
- Governance Tokens issued to DAO participants that allow them to vote and participate in the decision-making process of the project’s development.
- Functional Tokens that give access to certain services or products offered by the crypto project.
- Internal Tokens, which can be used to purchase a token project’s internal resources and assets
24-Hour Trading Volume
This token metric is used to measure the monetary value of all trades and transactions that were completed in the particular cryptocurrency during 24 hours.
It is an indicator of liquidity, showing how frequently the token has been bought and sold by investors. A larger trading volume indicates higher liquidity for the asset. If investor confidence in the token is high, it implies that investors have a positive outlook on the asset.
A higher trading volume also indicates that the market has a good demand for the token. Thus, its value is likely to increase. On the contrary, a lower trading volume might indicate issues for the asset.
A cryptocurrency’s supply can be measured in two ways:
This is the total number of tokens that a crypto project will ever issue. If a token has limited supply, there could be more demand for it and can drive up prices, and if a token has unlimited supply that means the prices could go lower due to reduced demand.
Circulating supply refers to the total number of tokens issued that are in circulation. These listed tokens can be bought and sold on crypto exchanges. If a project increases its token’s circulating supply, it is a sign of rising demand and can also help improve its valuation.
Price is a common indicator investors use to “time the market” to purchase the token at a low price and later sell it for a higher price. Although it is advised to constantly refer to the current and past market price of a token, it should not be the only metric used to make an investment decision.
Token liquidity is a key tokenomics indicator that designates how much value is in the cryptocurrency’s liquidity pool. It is correlated with the price impact of trades conducted using the token.
The rule of thumb here is that the higher the liquidity, the lower the price impact, and the lower the liquidity, the higher the price impact. It should be noted that tokens with low liquidity are more riskier to invest in than tokens with high liquidity.
There are two models in which cryptocurrencies function; a deflationary model and an inflationary model
The inflationary model refers to a token that does not have a maximum supply limit and will continue to be produced forever, increasing the number of tokens that will be available to investors. This may lead to a decrease in the token’s value in the long run.
Meanwhile, a deflationary token either has a maximum supply or a decreasing supply. Some projects tend to remove a certain number of tokens from their supply at set intervals, reducing the number of available tokens. This can also lead to an increase in the value of the cryptocurrency.
This token metric refers to the total number of wallets that were created to store the tokens purchased by investors.
This is indicative of the total number of users a particular cryptocurrency has. A token with a large number of users and active addresses has the potential for increased usefulness.
All-Time High and Low Price
A given cryptocurrency has its record of highest and lowest prices that were paid for by users. These price fluctuations signal whether the asset has reached its bottom or peak.
There are several websites available where you can check all the above-mentioned token metrics, such as CoinGecko, Coinmarketcap, and Cointree. Hopefully, this article has given you an idea of what a token metric is and how it can be used to evaluate a cryptocurrency.
Please do your due diligence before investing in any cryptocurrency. Invest responsibly.