When you calculate the Effective Value of purchased Cryptocurrency through Tokenomics will determine your expertise. We’ll, buying a cryptocurrency is in the hit list of every millennial’s weekend tasks; especially on the first weekend of the month, after a fat salary is credited.
Asking friends for a suggestion during a weekend getaway; or scrolling down on ‘crypto Facebook groups’ while sitting at home during this pandemic- is what the usual practice is.
But cryptocurrency investing is not a weekend task. It can be mastered over a few weeks, though!
If you are able to predict the price of cryptocurrencies, you can become a good investor.
Two Ways To Predict The Price
The price of any currency, commodity, or a stock can be predicted using
- Fundamental Analysis
- Technical Analysis
Let us understand the difference between the two with the help of examples; rather than slogging our ways out through the financial jargons.
Let’s take the example of the stock of Apple.
Before buying the stock of Apple, we need to know:
- How much has it earned in the last year or so?
- Which new geographical locations it is planning an expansion to?
- Is its technology developing with the need of the hour or will it face an obsolescence risk?
- How are its competitors doing?
- Are the raw materials for phone manufacturing becoming expensive?
This is Fundamental Analysis.
You also need to know:
- What was its price last year before the pandemic?
- Why does it always go down after hitting $137?
- Is it undervalued at $120 or should I wait for $110?
- How many shares of Apple should I buy if I have $10,000 in my trading account?
- If it is going up after my entry, what will be the correct price to sell it to maximize profits?
This is Technical Analysis.
The study remains more or less the same for all asset classes- stocks, cryptocurrency, fiat currency and commodities.
Let us understand the important aspects of fundamental analysis of cryptocurrencies from a practical implication point of view.
Though there is a minuscule fundamental difference between a crypto coin, a crypto currency and a crypto token; we are considering them the same for generalized understanding.
Let us declare this space as a “No financial jargon zone”; and dive into how you can predict the price of cryptocurrencies using the fundamentals of Tokenomics- the economics of tokens.
Origin Of The Coin
A cryptocurrency which is developed on its own without being influenced by any other cryptocurrency is an original cryptocurrency. Example: Bitcoin
Such a crypto coin has got endless possibilities as it is one-of-its-kind. This cryptocurrency brings in something new to the blockchain ecosystem.
Being a new entrant, it can be something which the blockchain ecosystem lacked; thus adding value to the users. This will see its price rocket up after launch and sustain until it faces a new challenge or competition.
But if this new entrant doesn’t add value to the ecosystem of cryptocurrencies, it will quickly lose its sheen. Such coins can get devalued very quickly.
A new coin, if backed up by a good team and marketing tactics, can help its price move up north. But if it fails to do so, the results can be devastating too.
Hence, it is important to know the fundamental technology and the need behind any crypto token to determine its possible future price.
A fork cryptocurrency is formed by a change in the blockchain’s protocol of the existing cryptocurrency. Example: Bitcoin Cash (BCC)
A fork crypto token will always have the added advantage of the inherent infrastructure of the base coin. It will also have access to its followers’ community.
Hence, if the fork satisfies some need of the followers, which the base coin could not; then its price will move upwards.
But, if the innovation of this fork coin becomes contentious; then it is likely to be disliked by the users resulting in the downfall of its price.
The price of the base coin will also be affected by the performance of the fork. It can cause a split in the followers. The base coin can also become obsolete if it is no longer needed.
These aspects need to be taken into consideration while you are predicting the price of a fork crypto coin.
Cryptocurrency built over an existing chain
There are many new crypto coins which are being minted using existing blockchain technology- like the Binance Smart Chain or the Ethereum Virtual Machine. Example: Weentar
The advantage of such coins is that its developers and followers are already doing well. The new coin starts with the inherent characteristics of the smart chain. This has a direct impact on its price.
The disadvantage is that it is always compared to the other coins on the same smart chain. This attracts criticism from the community. Also, it is at the mercy of the base smart chain technology. This dependency has a direct impact on its price.
Overall, the performance of the existing chain reflects the price of the crypto coin.
Supply Of The Coin
It is the relation between the supply and demand of a currency or commodity that decides its price. Everything hovers around supply and demand in economics.
Similarly, the crypto coins too depend mainly on supply, as the supply of every crypto coin is limited. For example, there is a fixed number of Bitcoins that can ever exist, i.e. 21 million.
Demand plays a relatively secondary role with crypto coins.
The supply can be categorized as circulating supply and maximum supply:
- The circulating supply is the number of tokens that are already in circulation
- The maximum supply represents the maximum number of tokens a cryptocurrency will have eventually
If the circulating supply of the coin is too much within a stipulated period of time as compared to its maximum supply; the price of the coin is likely to be dragged down.
This happens because more supply of any damn thing in the world causes its prices to fall. And the reverse, otherwise.
That is why the price of something like a trip to Antarctica is more; because the supply of such travel agencies is low in the travel industry.
Hence, if the circulating supply is manipulated in such a way that it keeps a healthy demand in the cryptocurrency market, and doesn’t supply too much, the price of the coin will rise sustainably.
If a coin’s circulating supply is nearing its maximum supply, the incremental rise in price will be lesser as compared to earlier.
There are many crypto coins which are minted at its launch, but circulated slowly thereafter. Also, there are coins which are minted slowly and circulated as and when they are minted.
There are a few other ways to control supply:
Staking is an activity where a user locks his crypto coins to participate in maintaining the operations of the blockchain system. Hence, those crypto coins remain locked and are not available for circulation to others; thus reducing supply.
Some crypto coin owners decide to burn out a part of the user’s crypto coins as a transaction fee on the blockchain. There are many other ways of coin burn too. This reduces the existing crypto coins. Hence, the circulating supply decreases.
By having access to information about staking and coin burn, you can make an apt judgment about the future price of the coin.
Information about all the above fundamental parameters will make the prediction of the crypto coins relatively easy.
Types of Tokens
A crypto token which is identical to another similar token is a fungible token. Example: Bitcoin.
One Bitcoin with you is the same as one Bitcoin with your friend. No difference, right?
So, if such a crypto token is widely used as a mode of transaction by masses, its demand will increase. The price of such a coin will increase.
A token which is not identical to any other token is called a non-fungible tone (NFT).
Such a token can never be used as a mode of transaction for masses, as its value cannot be derived from any other such NFT or a fungible token.
NFTs are collectibles. Hence, what drives the price of such tokens is the scarcity of the underlying asset it signifies.
Its price can shoot up if someone interested in owning that collectible decides to buy it for ten times its price, lets say. Or it remains devalued forever.
You can relate it to one of those elephant tusks- valueless for many and very much valuable to a few.
A token which allows access to many other applications and services on the blockchain is called a utility token.
It can be said that they have a value due to the function or property they represent.
Example: Basic Attention Token (BAT)
Such tokens rise in value as the entire ecosystem of crypto coins rises. The price depends on the other tokens it has an affiliation with.
Crypto tokens that share profits or invest in assets of other tokens are called security tokens. The profits generated from these investments result in the rise of price of the security token.
Since the investment part comes into picture here, these tokens are subject to taxation laws and regulations of the central bank.
Hence, its price is subject to government policies in a direct way. Its price also depends on the performance of the tokens it has invested into or is transacting with.
Learn and Earn
Earning by trading and investing in cryptocurrencies is easy if you learn fundamental and technical analysis- not a cakewalk though!
Technical analysis is always followed by fundamental analysis- tokenomics in this case.
It can be understood as if- fundamental analysis helps with the selection of the prey amongst the many in the jungle for the leopard; and technical analysis decides when to attack.
Keep learning, keep earning!
“If you are here to learn, you will earn. But if you are here to earn, you will only learn”, said a wise man about trading in the financial markets. #KhabarLive #hydnews