Filter Your Native Token List with Fundamental Analysis Part 2 (Tokenomics)

Fundamentals this, fundamentals that….

TELL ME ABOUT THE TOKENOMICS!

Hey Again!

I know, I know. Tokenomics are typically the hottest topic anyone looks at when investing into a new project or quantifying an analysis for potential investment. So let’s learn about how I use tokenomics analysis to give me a better shot at a beautiful 100x.

What really is tokenomics analysis though? I feel like I hear this term thrown around a lot and just don’t know what people are exactly focusing on?

I’m glad you asked.

Tokenomics analysis is the idea of analyzing a crypto project’s token in order to understand if it’s a good investment.

There are 3 main criteria that I, and other investors, use when quickly analyzing a token:

1. Token Distribution - who is holding the token

2. Token Circulation - how much of the token supply has been vested or is out on the market for trading

3. Token Utility - what is the main use case of the token and do investors get anything from holding it

Tokenomics are a way for crypto projects to showcase the theory behind their token, who is receiving the token, and what the token does in the broader ecosystem of their crypto project. Most projects add this to their documentation very clearly these days.

For example, tokenomics of a crypto project can look like this:

In this image below, we can see the total distribution of tokens at the beginning of this project, which can help us build expectations of how our investment performance will do. This is just an example as IAG has significantly distributed past this point. This graph was made in 2023.

So that’s what tokenomics is…

But why should this matter to us? Why do I need to know the tokenomics before investing?

If you want the MOST potential at the crypto 100x this cycle, you need to place yourself in the best case scenarios. Tokenomics are always changing as a project continues to develop because of vesting cycles and distribution changes. Understanding tokenomics can help you find the best investments at the best times. Let me show you an example.

The below graph shows the initial tokenomics distribution of the LQ (Liqwid) token in 2023. This distribution is decent for retail investors (although could be better). We see about 50% going to the retail public.

From this distribution of the LQ token, we can then look at the circulating supply over time, which is where the LQ token ran into some trouble over 2023-2024.

The below graph highlights how we are in the most aggressive allocation phase, with tokens being distributed over 3-ish years. The LQ token started with only 18.6% of all tokens being released, and over 48 months will release all 100% of the tokens into the circulating supply. With this kind of distribution, investors must be cautious of how an increase in supply can affect the market cap of the token, and therefore, their gain potential.

The first 23 months of the 48 month vesting period release at a much steeper curve than the last 25 months.

Because of this constant release of LQ tokens, the below price chart for LQ has taken a significant hit. It does look like price can be rebounding soon, but over the past 2 years, price has taken a hit as circulating supply has been increasing. As circulating supply increases, the market cap of the project can also increase depending on where price settles at.

So tokenomics require further understanding than just saying “oh this project gives tokens to the public?”…

YES!

Tokenomics analysis is a balance of token supply, token distribution, and token utility

So how would you go about analyzing tokenomics to find a 100x?

I’m very glad you asked!

What I would do, is grab my list of tokens from last week and begin to filter through them for projects with tokenomics that:

1. Give a majority of tokens to the retail public (50% or more)

2. Have higher circulating supply so we can avoid high sell pressure

3. Have good token utility and reasoning for the token to exist (this isn’t always perfect)

Let me explain these 3 concepts a bit more.

Token distribution:

Basically who was given tokens at the inception of the project. To protect yourself, you want as much of the token allocation to go to retail investors (public) as possible. This means that you don’t have massive VCs, developers, founders, teams, etc dumping on you at key price levels.

The more distributed the token is, the less chance of manipulation by one party. Token distribution also allows for the market to find the fair price of the token.

With token distribution, I always try to invest into tokens with at least 50% of the token supply going to the public (retail investors). This helps protect my investment and reduces risk. Anything less than 50% and you are willingly investing into something where the public is not a majority token holder. I can’t willingly put myself in that scenario.

Token circulation:

How much of the token is out for the market to use, and how quickly will more tokens be released. Circulating supply of a token influences market cap, liquidity, and dilution of current holders through inflation. Take BTC for example. Do you think that the last remaining BTC yet to be mined will dramatically alter the current price of BTC? I don’t.

But imagine if you invested into a token that had 25% of the supply released currently and planned to release the remaining tokens over the next 3 years. Do you think there is a significant potential for the released tokens to impact the current price? Yes!!!

Let’s look at Cardano’s supply metrics below:

Circulating supply: 35 Billion

Max supply 45 Billion

So, we know that there are 10 billion more ADA to be released but almost 78% of the ADA token is already in circulation! This limits potential dilution through inflation over the long term.

The current and max supply also influence ADA’s market cap. The market cap box is what the current price multiplied by current supply equals. The fully diluted market cap (FDV) is current price multiplied by max supply. So we can see how increases in supply of the ADA token will increase the market cap of the project slightly.

If you did this on a much more massive inflation scale, you would have no room for token price growth and definitely not achieve the 100x.

Token utility:

What can people do with, or what do they get out of, this token. Technically, the more utility a token has, the better off the investment should be.

Now, crypto is a relatively new market still and teams are still iterating on how to provide utility in the best way possible. There are some investors who only buy utility plays, and some investors who only buy tokens with zero utility. I am somewhere in between.

I think you should strive to have as much token utility as possible, but if you have analyzed everything else, and token utility is still somewhat lacking, I wouldn’t write the investment potential off just yet.

I think there are 2 ways to view token utility from a 100x perspective.

1. Current utility

2. Future potential utility

Current utility is pretty standard. What does the token do right now or what benefits do you get from holding it today. Most times it’s something like governance, use on the dapp in swaps or loans, etc. Pretty standard, okay level of utility.

Future potential utility is ideas that the team has suggested on how to increased token utility over the long term. I want to preface this by saying this is where the grey lines and speculation come into play (but hey this is crypto baby). You really have to figure out if the team can deliver on future utility or what the scenario is, but I like investing into potential future utility if current utility is good enough.

I see token utility on a spectrum from none to a lot. I just want projects I am invested into to at least have medium, average, down the middle levels of current utility and added potential future utility. The current okay levels of token utility help support and de-risk all the other things we have looked at with tokenomics, while the future utility gives a lot of potential for new investors to come in and implies more value created by the team long term.

A couple scenarios where I have invested like this are lending protocols and DEX tokens. When projects launch they often can’t do revenue sharing to token holders because of limited revenue generated, but when I see and hear projects talking about using governance to add revenue sharing and other future utility, I tend to find that as a good thing when current utility meets average market standards and the rest of the tokenomics line up.

I don’t want to make this email that much longer, but this is pretty much how I analyze tokenomics to give myself the best shot at a 100x. I take the list that I did fundamental analysis on, and I filter all those tokens through tokenomics analysis.

Ask yourself:

1. What is the current and max supply and how often are tokens vesting (being released)?

2. Who was given tokens at the beginning and who is holding tokens now?

3. What current and future utility does this token have?

If you can answer these with confidence, you will have a much better shot at finding great investments.

Here’s a link to post number 5 in the Crypto 100x Blueprint on CHART ANALYSIS:

We all love watching the charts and I will show you how I analyze them for undervalued altcoins.

Thanks,

Dawson