How to Find the Best Altcoins – Part 2 | Tokenomics

In part 1 of How to Find the Best Altcoins we discussed some of the most important things to look for when assessing a project. But, if you want to find the best altcoins with high potential returns, you can’t just look for a solid team and a good idea. One must also pay attention to the tokenomics which play a vital role in the successful outcome of new and rising blockchain technologies.

Tokenomics represent the economic structure of a token or coin and are something that must be considered carefully when discussing how equity in a project will be divided. Assets are usually split up between a handful of various categories and say a significant amount about the direction of a protocol. For this reason, when researching a protocol, the tokenomics are one of the best places to start and are generally found in a project’s whitepaper or obtained through social channels. It’s never wise to purchase an asset that doesn’t have a clear outline of its Tokenomics.

Team & Advisor Tokens

The most common distribution you can find in tokenomics is the team & advisor tokens. This is the equity allocated to a project’s creators, advisors, and active developers. Not every project will include this distribution. Those that do should seek to take less than 15% of a project’s total token supply. Projects that forego this method of self-pay always strive to foster a truly decentralized application and receive payment for their work in the form of the next on our list.

Foundation & Treasury Fund

Through the use of a foundation or treasury fund, projects allocate tokens to secure future resources for development. Sometimes this can also include a reserve fund outside of the treasury or foundation fund to separate development funds from a protocol’s standard operating funds. This equity in a project helps to ensure that despite market conditions for a token or coins price, the development process remains moving forward. Ideally, no more than 25% of a project’s total token supply should be put into this type of fund.

Private & Public Sales

Private and public token sales, commonly referred to as coin offerings, come in all different forms while following the same basic outline. This portion of the token supply is meant to provide the initial capital for a new project and this metric can vary greatly depending on the crowdfunding method deployed. More commonly we see a disproportionate amount of tokens allocated to private pre-sale and seed rounds. A protocol that is not community-focused will show this clearly by providing less than 5% of the Total Token Supply to public sale participants.

Marketing

Marketing is an important token metric for any project. If you want to be heard in the sea of protocols launching every week, a project needs to have a marketing plan. For organic grassroots protocols such as DAOs, this is less necessary. Funding for marketing is usually provided through the use of pre-sale funds, meaning the bigger the venture capital firms supporting the project, the larger you can expect a marketing campaign to be. Marketing will usually be seen taking up 5% of a project’s total supply.

Community Incentives

Community incentives are one of the best metrics to see when researching a new project. This clearly shows that a protocol is looking to foster a strong community by incentivizing activity. This includes “airdrops”, bounty campaigns, and bug hunts for bad code. Staking rewards are another common form of community incentive. Any allocation, up to 100% of a project’s total supply can make up this token metric. 

Liquidity

“Liquidity” is a vital part of any project’s operation. Without it, a protocol can suffer from wild price fluctuations and market manipulation. Liquidity allocations include mining incentives and liquidity bootstrapping. Liquidity incentives are given as a reward for those who provide liquidity on “decentralized exchanges”.

The majority of these tokens are locked into smart contracts. Allowing traders to swap their tokens on automated market makers. Liquidity can be seen taking up to 50% of a project’s total supply.

Demand Still Matters

Next, I would like to point out that none of the above actually matters if there is no demand for the token. A key question to ask yourself is what is the function of this token and does the token actually capture any value for users?

A classic garbage token is the governance token. You get the token and you can make decisions on the platform’s future. The problem is that even if this was a reason for you to get the token, developers, VCs, and other insiders will control the majority of tokens. Your “governance vote” will be useless.

By contrast, a token for a decentralized exchange that pays you a set portion of the fees has big potential value. Or a token that has a built-in burn model that continually burns tokens away thus reducing supply. I’m going to let you in on a little secret, tokens are often just fundraising tools that carry little to no utility. Buyer beware.

Memes and narratives drive this market in surprising ways, but if you want real value long-term and not just a short flip then your coin had damn well better have some actual purpose.

The Important Questions

Now that you understand tokenomics, let’s look at the most important questions to ask yourself when researching an altcoin:

• How many tokens are circulating now and what is the total supply? If only 3% of a token is floating on the market and 97% of the tokens are still set to come out what do you think will happen to the token price? Especially if demand is low? 
• Who has most of the token supply and when can they sell? Often, not always, but often, token unlock days result in big price dumps. Early buyers got great prices and most companies make monthly or quarterly unlock days. So you can almost set your watch as to when to expect a coin to have a short-term price dump. 
• What’s the market cap? It is hard to talk about tokenomics without talking about the market cap. First, let’s mention the circulating market cap. This is the current supply of coins available on the market. If 3% of the tokens are out and it has a market cap of 30 million dollars then the fully diluted market cap is 1 billion. You need to ask yourself if the current circulating market cap is justified based on the progress and adoption of the coin. Does the fully diluted cap seem absurd or not? 
• Am I buying this because the coin is cheap? This is the fallacy of cheap coins. Assuming equal market caps, I will take a coin that costs $1000 per coin with utility versus a coin that costs 0.00001 per coin but it is just a meme. A lot of Shiba Inu investors really believed that it would go to a dollar, but this assumption defies reality and mathematics. So, actually do the math and ask yourself if your price predictions are even vaguely grounded in reality or not.

If you can apply the information in this part of the guide then your chances of buying good versus bad altcoins will likely improve a lot.