Why Crypto Investors Should Care About Tokenomics: Crypto Long & Short

One important consideration for any digital asset investor allocating money to alternative coins is tokenomics. For the uninitiated, tokenomics refers to the economic and financial aspects of a cryptocurrency or project’s ecosystem. It encompasses the design, creation, distribution and management of the native tokens used within the project. Tokenomics plays a crucial role in shaping the economic value of tokens and the incentives of token holders within the protocol’s ecosystem. It involves careful considerations across various interdisciplinary fields, from economic principles, agency problems and game theory to oracle problems and blockchain architecture tradeoffs.

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In short, tokenomics effectively defines the utility, monetary policy, distribution and incentives of the project’s token. Done well, tokenomics can be a supporting pillar in creating a thriving and valuable ecosystem. Done poorly, it can create a zero-sum money game or worse – a system teetering on the brink of instability (see algorithmic stablecoins).

One aspect of tokenomics that is particularly important for investors who exit the heavily traveled digital asset highway of bitcoin and ethereum to take the scenic altcoin backroad is token issuance. Issuance is typically done to raise capital for various purposes, such as funding expansion, reducing debt or investing in new projects.

When a project issues new tokens, digital asset investors need to consider the following:

• Dilution of Ownership: When new tokens are issued, existing owners get diluted, resulting in a decrease in the ownership percentage and control that existing token holders have in the project. To the extent that the initial distribution of tokens favored the initial project investors and founding team, this effective change in control can be minimal relative to community token holders. This dilution impacts the explicit or implicit value per token, as ownership of the future utility from the project is spread across more units. Whether or not the project’s total market value increases or decreases depends on the use of the capital proceeds raised.
• Use of Proceeds: If…