Crypto Tokens and Coins: What Drives Performance?

The more popular the token, the higher the price, right?

April 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Investors assume that token prices increase with product utilization in the token ecosystem
  • However, the correlation between the token prices and token volumes has been zero
  • Likely explained by token prices substantially being driven by speculation

INTRODUCTION

Much of the crypto world is, by definition, cryptic and difficult to understand. But two crypto trends are crystal clear: Both talent and money are flooding into the digital currency market. Almost every day brings a fresh announcement of software developers from Google or financiers from JPMorgan joining crypto start-ups that are about to revolutionize something.

Indeed, while the total market capitalization of cryptocurrencies has fallen from its previous heights, it is still above the $2-trillion threshold. That’s the equivalent in value of the entire German stock market, which includes such blue-chip companies as Siemens, BMW, and Volkswagen (read Cryptocurrency Hedge Funds).

It is as easy to invest in crypto today as it is in equities, but what is actually being bought is not as clear. When an investor purchases Shiba Inu — a token with a $15-billion market capitalization and a Shiba Inu hunting dog mascot — SHIB tokens are deposited into their digital wallet. But what do they really own? And what drives SHIB’s performance?

Theoretically, the more popular the token, the higher the price. But does that relationship hold up in practice? Let’s investigate.

TOKENS VS COINS

Before diving in, we first need to define some basic crypto terminology: A token is a smart contract based on a blockchain, while a crypto coin is the native token of a particular blockchain. For example, ETH is the coin of the Ethereum blockchain, while SHIB is a token based on Ethereum. While all coins are tokens, not all tokens are coins.

The number of tokens has exploded over the last couple of years, and tokens now outnumber coins by a factor of eight. Ethereum and Binance Smart Chain account for a combined 85% of the market share of the blockchain infrastructure layer where tokens are bought and sold. T