Demystifying Cryptocurrencies: Exploring the 5 Distinct Asset Classes

DISCLAIMER: This is not financial advice; the article is for educational purposes only. These observations, takeaways, and predictions are based on my direct experiences with Blockchain and Cryptocurrencies for 10 years and have seen it evolve, crash, morph and grow. I am not a qualified financial advisor, please consult a professional for investment advice. I am also not advocating investing decisions based on any specific analysis mentioned in this article.

Cryptocurrencies are a true product of the digital age, they are not managed or governed by central authorities like banks, governments, or middlemen and can operate efficiently without them. This asset class has evolved so rapidly that it has created confusion amongst many others. The very use of the term “altcoin” has outlived its use as crypto assets have evolved into roles where they are not alternatives to Bitcoin, nor will they ever be.

I have heard lame statements calling them “private currencies” or even painting them all with one color and brush. For this article, let us separate blockchain and focus only on cryptocurrencies. As time has passed there are five distinct categories of crypto assets that have evolved from the early days, each has its own place in the ecosystem, its own use cases, and growth trajectories.

The objective of this article is to make sure that people understand the differences very fundamental to their use and growth potential. Let us take a quick look at the five categories and the definitions around them.

Cryptocurrency

Bitcoin is the biggest crypto asset and arguably the only cryptocurrency of real relevance. It is a reserve currency that has morphed into a store of value and has become a macro investment vehicle. There is no underlying asset value like fiat, neither is backed by anything here, and hence difficult to model cashflows it is purely a currency. Bitcoin's intrinsic value rise in its scarcity and the trust people have in it, just like The US dollar or euro. It is a symbolic shift of trust from the old i.e., central, and commercial banks to the new i.e., algorithms. Bitcoin is now accepted as the reserve token of the digital economy with governments, banks, institutions, and retail all taking considerable interest in it. It is widely accepted there is a future where two parallel systems will exist with Bitcoin being the central cryptocurrency for the digital world.

In my mind, there is only one true cryptocurrency, and that is Bitcoin. There are several commodities and tokens implemented in a manner that can function as cryptocurrencies in limited setups. The ability to monetize these implementations into either commodities or currencies can drive value.

Crypto Commodities

In the physical world, popular commodities include metals and oil. However, in the digital world, they correspond to network, storage, compute, platforms, and protocols, helping create tokenized digital products. Within crypto commodities, more than one will likely scale based on the use case. This is the category that Ethereum belongs to, it is the market leader with many decentralized applications (DApps) built on it today. There are several hundreds of other protocols and platforms like it with other chains like Cardano, Casper, Solana, Polkadot, etc. trying to create their own chains and use cases.

Each is trying to weave their own digital ecosystems like iOS and Android app stores with their own applications. This category of crypto assets is crypto commodities fueling the development of finished goods i.e., tokens. It has a different risk-reward ratio and has no relation to Bitcoin, monetary policy, or macroeconomics.

Crypto Tokens

Tokens are analogous to finished digital products built through crypto commodities. Many of these tokens are “asset-backed” i.e., backed by something of real value e.g., equity, debt, other digital assets, or other income streams but it is something tangible and you can model this as debt or equity instruments are modeled using free cash flow using dividend yield models, etc. These have nothing to do with Bitcoin or Ethereum, they are a completely different asset class.

Hybrid Tokens

The newest and most revolutionary of the assets are these part loyalty, part equity, and part utility tokens which have pass-through value. They accrue real economic value, passing them directly to token holders. The BNB coin from the exchange Binance is a good example, an entity that has real employees, shareholders, board, and equity. If you own the BNB token, you get part utility, part rewards right to use it to get discounts trading on their platform. Binance takes its profits through buybacks and token burns every quarter, making it behave like an amortization token with sinking fund economics. There is the economic value created by burns and profits passed through to token holders, they also multiple rewards and discounts. Basically, this hybrid model is packaged into one security and these hybrid tokens are at the heart of DeFi, these are propelling NFTs and gaming with many emergent use cases. None of these have got anything to do with Bitcoin, Ethereum, or asset-backed crypto tokens, they are very different things.

Shitcoins

Elon coins are what they are called today, erstwhile shitcoins were tokens that had limited use cases, solved any problem. Lots of them need not exist or have weak to no use cases. A lot of these are pumped by crypto influencers of social media and create hype. If asset classes exist, so with investors, traders, speculators, and scammers. These Shitcoins (Elon coins) are short-lived and drive no purpose.

Concluding Thoughts

These are all digital assets, only related by technology and structure. For example, it is like stating all fixed income vehicles are bonds, but they are different by sector, design, and execution mechanics. While Bitcoin may have launched a new asset class over a decade ago, today they are many asset classes, and none are cryptocurrencies.

The older idea about cryptocurrencies is stale and obsolete giving birth to an array of exciting asset classes which will deliver freedom, efficiency, growth, and scale when compared to the constraints of the old economy financial industry.