Tokenomics refers to the economic and financial aspects of a cryptocurrency or project’s ecosystem and is crucial in shaping the economic value of tokens and the incentives of token holders within the protocol’s ecosystem. It is important for digital asset investors to consider token issuance when allocating money to alternative coins. Token issuance is typically done to raise capital for various purposes, such as funding expansion, reducing debt, or investing in new projects.
When assessing token issuance, investors should consider the utility, monetary policy, distribution, and incentives of the project’s token. Additionally, investors should be aware of the asymmetric information and agency problems between protocol development teams and token holders. Managerial market timing, or when project insiders make token transactions based on their perception of the protocol’s token price movements, is also something to be aware of.
To test how the digital market has historically viewed token issuance, a CoinDesk Market Index universe of tokens was analyzed. Results showed that the majority of token issuance occurred during the crypto bull market of 2020 to 2021, with the height of average token issuance peaking in the first quarter of 2021 at about 67% annualized. Subsequent token issuance has reduced by over half during the 2022 to 2023 crypto bear market.
A multivariate regression was also run to test the market’s sentiment and reception for token issuance. Results showed that investors once considered token issuance a bullish event, particularly during the bull market. However, after the market peak, token issuance is now viewed as a neutral to negative event, as investors consider the token dilution effects to be greater than the growth prospects of the protocol’s roadmap.