In 2022, everyone knows about cryptocurrency. There’s only one problem: there’s no such thing. When the industry was just starting out, cryptocurrency was a straightforward term to talk about its original goal: cryptocurrency as a means’ of payment. Since then, the industry has transformed beyond imagination, with the number of digital assets exploding from 10 to over 20,000.
The term “cryptocurrency” is now outdated and not really applicable to such a diverse industry. In fact, not having the right terminology plays into the hands of critics that have a vested interest in keeping digital assets out of the financial mainstream. Now it’s time to take control of the narrative and start talking about it in a more nuanced way that reflects what digital assets truly represent.
My simple way to categorize digital assets
Most ways of categorizing digital assets focus on the technical or legal nature of the token. I don’t think this is useful or conducive to furthering the needs of the industry.
My framework for understanding different categories of digital assets focuses on the perspective of an investor, as well as on what these tokens really do. Here’s how we’ll break it down.
- Store of Value
- Financial applications
- Other applications
Now we’ve separated into our broad categories, let’s dive in.
1. Store of Value Tokens
For every dollar that a government prints, it makes the one in your pocket less valuable. During the coronavirus pandemic, governments printed billions in new currency, which is part of the reason we are experiencing high inflation today.
For years, gold was the go-to store of value for investors because it is limited in supply and universally accepted. But since 2009, a new digital alternative to gold burst onto the scene: Bitcoin.
Unlike currencies created by governments, Bitcoin is inherently deflationary. Only 21 million can ever exist and these are created slowly over time. It doesn’t need banks and anyone can mine their own Bitcoin, although you might need some serious computing power.
The simple economics of Bitcoin and relatively slow transaction speeds have made it less like digital cash and more like digital gold. Because only a fixed number can ever exist, the price will likely go up as demand increases. This is why many investors feel that Bitcoin is a safer investment than other digital assets. Physical gold has also been tokenised to make it available to digital asset investors.
- Digital gold (PAX Gold)
2. Blockchains – Fundamental Infrastructure
Blockchains are the second most important category. Blockchains, such as Ethereum and Cardano, are decentralized transaction networks. They are protected using cryptography and are secure because they are spread over a network of thousands of computers. Each blockchain has a native token that enables users to use the chain and acts as a proxy for the success of the network. The more people and applications on the blockchain, the greater the value of the token.
We can break the blockchain category into a few sub categories:
Layer 1 applications such as Ethereum
Interoperability projects, such as Polkadot
Layer 2 solutions like Polygon
Here are the most popular tokens in the category, ranked in order by market cap:
3. Financial applications
After Bitcoin and blockchains, the biggest accumulation of value is found in the tokens of the companies and projects that build financial applications. These vary from payments to exchanges and financial infrastructure projects.
There are five major categories within financial applications:
4. Financial infrastructure.
A quick note on (de)centralisation:
Within these categories there are companies that build their applications as a centralized entity, much like a normal company. There are also companies that call themselves decentralized, particularly in decentralized finance (DeFi). The main differentiator between the two applications is who holds the private keys to the wallet.
Investors can choose from either centralized or decentralized platforms for lending and exchange services. Centralized exchanges were there first and grew into the biggest financial companies in the blockchain space. Later, around 2020, decentralized exchanges (DEXs) burst onto the scene and have been growing ever since.
Decentralized finance is digital assets for crypto purists. If you’ve heard the old crypto saying “be your own bank”, this is what they mean. You have total control over your finances from where its stored and what you do with it, to how it earns for itself. But that also means you are solely responsible for the risks. You manage the private keys to your wallet and there’s no way to restore your funds if you lose them.
Now we’ve cleared up centralization and decentralization, let’s dive deeper into the key categories:
These tokens focus on making payments outside of the traditional banking system. They aim to fix the pain points of the traditional finance, such as middlemen raking in fees on transactions, as well as the amount of time it can take for transactions to clear internationally.
That’s if you even have access to a bank account to begin with. More than 2.7 billion people worldwide lack access to traditional banking infrastructure. Payment cryptocurrencies are a way for them to transact with people with whom they cannot meet and make a physical payment with fiat.
To use these cryptocurrencies, all you need is an internet connection and a smartphone, which many of the world’s unbanked already do. Payment cryptocurrencies are also popular in undemocratic countries with high inflation or capital controls because they can’t be blocked by governments.
The most important cryptocurrencies listed in order of market cap are:
- Litecoin - Like Bitcoin but focused in its application for faster and more efficient payments
- Monero - a privacy-first payment coin that obscured all transaction data
- Bitcoin Cash – one of the earliest cryptocurrencies to be used by merchants
- Dash – which is popular in South America
Many people who find out about the industry through the media assume that all digital assets are hugely volatile and high risk. But that’s not the case. Stablecoins are backed by an asset, usually a fiat currency such as the US dollar or euro, and have a fixed price peg.
In terms of market cap, the most popular stablecoins are:
Stablecoins were invented after cryptocurrencies and fixed the biggest problem that the cryptocurrencies had: volatility. Stablecoins can be transmitted internationally, settled in seconds or used in various crypto lending protocols to earn interest.
That doesn’t mean that all Stablecoins are the same. Synthetic stablecoins are backed by a volatile asset, such as another cryptocurrency. They are inherently more risky and complex. You only need to look at the collapse of Luna to realise that.
We’ve already established that exchanges come in two forms: centralized and decentralized. The largest centralized exchanges and its native tokens in terms of their market cap are:
- FTX (FTT)
- Crypto.com (Cronos)
- OKX (OKB)
- Kucoin (KCS)
- Huobi (Huobi Token)
- The leading decentralized exchanges and their tokens in order of market cap are :
- Uniswap (UNI)
- THORchain (RUNE)
- Curve (CRV)
- 1Inch (1INCH)
Oracle tokens have such a prophetic name because they make it possible to bring in real world information to a blockchain.
Many applications on smart contract blockchains need this real-world data for their DApps to work. Oracle tokens do this by providing decentralized data streams from gathering data from a variety of sources such as institutions, as well as individuals. The oracle token then uses the average of these answers.
Like any other token on a smart contract blockchain, Oracle tokens are also used to pay for the cost of gathering this data through fees.
- Band Protocol
4. Other applications
It’s true that the vast majority of digital asset applications revolve purely around finance. But there’s an ever-expanding percentage of projects that only relate to finance in an auxiliary way. Examples of this are gaming and the Metaverse, as well as data storage and streaming.
Gaming & the Metaverse
Gaming is now a global industry with a huge and passionate user base. Until now, gamers had to deal with a fairly traditional market, where they buy games from developers and play them. Many games also require in-play micropayments.
Now, GameFi means that game worlds can have real, functioning economies where players can earn as they play and encounter other economic incentives. Valuable objects in games can now not only have value in-game but also of their own that can be traded for profit.
Metaverse tokens have a variety of functions, such as buying virtual land and paying for goods and services.
Some GameFi and metaverse tokens:
- SAND (The Sandbox)
- MANA (Decentraland)
- AXIE (Axie Infinity)
5. Data storage and streaming
People used to say that when you post something on the internet, it’s there forever. For anyone that had important data on the internet for a long time, they know this not to be true. Centralized platforms collapse, links stop working and data is deleted on the sly.
By combining data storage and blockchain, data will be permanently accessible, decentralized and democratized. The goal of many of these platforms is to create a reliable and publicly accessible source of data storage on the internet, forever.
Data storage tokens are used to pay for data storage, receive revenues as well as access the data storage platforms themselves. Some data storage tokens include:
- AR Coin
NFTs exploded into public consciousness during the bull run of 2021. Normies couldn’t get their heads around images of rocks, monkeys and pixelated humans selling for millions of dollars. Crypto investors scrambled to find the next NFTs that would go through the roof.
Despite their recent surge in popularity, NFTs have been around for a while. NFTs are not currency. Each one is unique and consequently cannot be exchanged for anything similar. In this sense, they are more like collectible cards than currency.
NFTs come in many forms, such as real estate, music, media, gaming assets, digital art, certificates for luxury items and redeemable tokens for events and organisations.
Why we need these categories to move forward
I believe in digital assets because they give people power. They don’t care who you are or where you come from, but they have the potential to transform your life. I know this to be true because it happened to me. In fact, I think digital assets will be responsible for the biggest wealth transfer in history because they finally give people mastery over both their finances and their destinies.
But we aren’t going to get there until we make this complex and sometimes intimidating industry a bit more user friendly. That starts with using the right words. For people who came up the hard way and did a lot of Googling, this might seem superficial. But making these definitions is beneficial for the industry long term.
First of all, by organising and categorising different assets, we can show critics that the industry is far more complex and multi-layered than they’ve ever bothered to learn. We show regulators, doubters and the unbelievers that there’s no such thing as one cryptocurrency, but actually a vast array of valuable assets, all with use cases of their own.
The second and more important point is that it is useful for everyone to have a more structured and efficient way of engaging with digital assets. The most obvious benefit of this is for unlocking the huge potential for self-directed investment.
With clear and concise categorisation of assets, we can leave behind the days of wealth fund manager gatekeeping and let people take control of their finance. Using the proper terms for different digital assets gives people the power to invest based on their own interests, passions and areas of expertise. Millions of people are waiting an opportunity to take the starring role in their financial future. We just need to show them it’s here already.
Disclaimer: The data provided in this blog is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. SMART VALOR believes the data in this blog is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. SMART VALOR has no obligation to provide any updates or changes to the data. No investment decisions should be made using this data.
Risk Disclosure: Cryptocurrencies can fluctuate widely in prices and incur permanent loss of capital and are therefore not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework. Past performance does not guarantee future results. Trading history presented is less than 5 years and may not suffice as basis for investment decision. More information is available under Risk Disclosure.