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In the current crypto market, with all of the different types of crypto-assets, from currencies to commodities to platforms to tokens, it is important for investors to make distinctions between the varying classes and sectors of cryptoassets.
For the purpose of this writing, throughout this post I will refer to everything under the crypto umbrella as a superset of “cryptoassets” and I will divide assets into subsets of “currencies”, “commodities”, “platforms”, and “tokens”.
Cryptocurrencies aim to be three things:
Bitcoin (BTC) was the first blockchain, and afterwards many other blockchains have been created. The original goal for many decentralized currencies such as Bitcoin, Litecoin, Dash, Monero, and others, was to make payments inexpensive, simple, and most importantly decentralized - free from third party management.
While these currencies all share the same goal, it is important to understand the different features and functions of each cryptocurrency to better determine its potential value, its possibility of success or failure, its valuation and ease of adoption.
These attributes vary from one currency to the next, so for the upcoming sections we will detail a number of these different currencies and their subsets, including privacy coins and stable coins and how they function in relation to your standard cryptocurrency.
Bitcoin currently is the de facto standard of cryptocurrencies, and it has ushered in waves of digital currency competitors built on decentralized peer-to-peer networks. The currencies inspired by bitcoin are collectively called altcoins, presenting their own cryptocurrencies as modified or improved versions of Bitcoin.
We can group some of these altcoins together with BTC based on similar functional properties and goals which are shared by all digital “currencies”. In form, these cryptocurrencies all:
Major cryptocurrencies such as Bitcoin (BTC), Bitcoin Cash (BCH), Litecoin (LTC), and many others all share this form. They can be mined and they have set monetary policies, and ultimately, their goal is to become open source global payment systems which utilize peer-to-peer technology to operate with no third-party (central authorities and/or banks).
Major differences, however, can be noted between these three currencies. Take for instance, Bitcoin Cash and Litecoin. Both have aimed to improve on the original Bitcoin protocol in their own ways. BCH increased the maximum block size in order to provide lower transaction fees, whereas Litecoin was designed with faster block generation rates to offer faster transaction confirmation times.
Other cryptocurrencies which are similar to these major players are privacy coins and stable coins. Privacy coins (like Zcash, Monero, or Dash) function in ways that allow for more anonymity, and stable coins (like Basecoin, Ripple, and MakerDAO) are coins which have pegged their value to real-world assets such as gold or the US Dollar. We’ll look at some of these now.
A common misconception about currencies such as Bitcoin and Ethereum is that the transactions are anonymous. This is not completely true as most blockchains only mask the identity of users, while utilizing a public ledger system as a public record of all transactions sent on the blockchain.
The potential problem here, particularly for privacy-enthusiasts, is that there are government agencies and chain analysis firms who have begun deanonymizing blockchains in order to reveal the identities of account holders. And while this may not pose an immediate risk to some, users of these non-privacy based currencies could be at risk of being unmasked as the agencies realize more success in the future.
Granting users complete anonymity has been as equally controversial of a topic as it has been a selling-point for potential mass/mainstream adoption.
On the one hand, as privacy-centric platforms typically utilize privacy features to obfuscate the sender and/or receiver, by means of stealth addresses and private transactions to mask users, some authorities view these coins as an illicit means for criminals to engage in illegal activities (e.g. money laundering).
On the other hand, these privacy features could lead to mainstream adoption, as we have recently seen when J.P. Morgan partnered with ZCash to integrate its zero-knowledge security layer (ZSL) functionality to their Quorum blockchain. What we have seen here is a major example of how big banks can begin cooperation with fintech companies to enhance technology in traditional financial markets.
For our more detailed research analysis, view Intelligent Trading Foundation’s report on privacy coins.
While the value of currencies like BTC and ETH are often highly volatile and driven by investors and speculation, Stablecoins such as Tether, MakerDAO, and Basecoin among others aim to create a price-stable cryptocurrency by fixing the value of their coins to real-world assets.
There are three categories of approaches to how different stablecoins function; they are either fiat-collateralized, crypto-collateralized, or seigniorage shares.
Fiat-collateralized stablecoins like Tether and TrueUSD claim to back each unit of their stablecoin with a corresponding unit of fiat currency, in this case the USD.
For every stable coin issued, a third party has (allegedly) received a deposit in USD (or other fiat currency, depending on the stablecoin). When a user wishes to cash out, the third party sends USD back to the user and burns a unit of the stablecoin equal to the USD withdrawn.
While these projects are easy to conceptualize, concerns lie in their reliance on a third party to hold fiat currency and the fact that audits of these parties will be long and expensive processes.
Moreover, without an independent audit, these projects can claim to be collateralized, but there is no way to know for certain if they truly have the fiat to back their stablecoins. Due to this, many of the fiat-collateralized stablecoins have become the subject of controversy, with Tether often in the spotlight as it has so far refused to provide any audit reports while constantly adding more coins into circulation.
Crypto-collateralized stablecoins like MakerDAO and Bitshares attach the value of a cryptocurrency (i.e. BTC or ETH) to a unit of stablecoin supported by the cryptocurrency held.
Instead of backing units with fiat currency 1:1 as mentioned above, crypto-collateralized coins must be backed by as much as 2:1 or even greater to compensate for the high price-volatility and to be secure against significant price drops.
The concern with these projects is that they may not prove to be capital efficient, and, further, there exists questionable price stability and security if the stablecoin is based off only one cryptocurrency.
Seigniorage shares stablecoins such as Basecoin are the most complex in implementation of the three categories of stablecoins.
This category is not based on collateral in either fiat or cryptocurrency holdings. To maintain price level, a “central bank” has been created to algorithmically maintain the supply of currency, increasing supply when prices rise and decreasing supply when prices fall.
Some concerns here are that the future of these coins depends on an ever-increasing future demand for cryptocurrency in general, and what is more, this structure is not as intuitive or as easy to explain as the others.
For more explanation, additional details can be found on the Basecoin whitepaper. It’s also worth noting that Basecoin has received investment from a number of reputable traditional VC firms including Andreesen Horowitz and Bain Capital Ventures, as well as the top crypto-only investors, including Pantera, DCG, and Polychain.
There is another level of abstraction we can add to the classification of crypto and it is that of crypto commodities, projects that offer a provision of a commodity such as data, storage capacity, or computing power.
Some prime examples of these in today’s world include:
These projects utilize smart contracts and programmable money, aiming to programmatically enforce legal and financial contracts without the use of a third party.
This decentralized platform runs smart contracts to facilitate applications that run as programmed, without the risk of down-time, censorship, fraud, or third-party interference.
The Ethereum Wallet allows you to hold and store ether and other crypto-assets built on Ethereum, as well as to write, deploy, and use smart contracts. What is more, this platform allows users to create tradeable, digital tokens that can be used as a currency, a representation of an asset, a virtual share, a proof of membership, or more. Tokens have a standard coin API so contracts are automatically compatible with all wallets, other contractors, or exchanges who share this standard. Read more on Ethereum here.
It is worth noting, that while Ethereum is one of the most well-known crypto platforms and is booming in popularity, there are two other major competitors in this category to keep an eye on. Cardano (ADA) and NEO offer similar platforms with added or modified features and capabilities.
NEO has seen a lot of activity in eastern markets particularly, and it has also become very popular in China, a country known for its crypto-skepticism. It offers a platform very similar to ETH, with some arguing that it performs better. This is yet to be seen, but NEO does have a high potential to tap into this untapped, eastern market.
Cardano has likewise seen a lot of success in regards to quality and stability. It is among some of the newest crypto systems and its team of professionals and academics has become known for their commitment to the technology. Rather than rushing to launch as quickly as possible, they have taken their time, often putting the focus on development. Due to this in part, the ADA price has not seen many rises and falls, unlike other crypto, and it has been and still currently is one of the most well-balanced crypto options in the market.
Together with ETH, these three are all fighting for the top spot in the crypto platform asset class. It will be a battle for transactions per second, scalability, and, perhaps, ultimately popularity to see who comes out ahead in the long-run.
SIA is a decentralized platform secured by blockchain technology.
How it differs from a platform like ETH is in the fact that SIA aims to be a blockchain-based storage solution rather than a facilitator of tokens and contracts.
The SIA Storage Platform leverages underutilized hard drive capacity around the world to provide a more reliable and lower-cost data storage marketplace than traditional cloud storage providers.
Simply put, SIA has created a storage marketplace in which storage providers compete for your business, ultimately lowering storage prices for renters. Renters pay providers in SIAcoin, which can be mined or traded.
Some noteworthy competitors in the realm of decentralized cloud networks include Storj.io and MaidSafe. Storj is a popular solution for storing files, very similar to SIA. They both aim to be a cloud for user files, offering more security, no downtime, and speed at a lower-cost than traditional providers.
MaidSafe on the other hand is unique in that it aims to create a new protocol on which data can be stored, accessed, and exchanged—“the new internet,” they claim. MaidSafe does not rely on blockchain technology, and their stated goal is to provide storage security better than that of the telecom giants who currently manage this data, and better than that of its competitors in blockchain-based storage solutions. Users need a custom browser to access the SAFE network, which as of the time of writing is still under development.
Augur is a decentralized, prediction market protocol platform. Prediction markets exist for traders to speculate and bet on the outcome of a wide array of future events. Literally any question or event imaginable can be bet on.
In the past, prediction markets were generally centralized, aggregating trades through the use of a physical ledger. The centralized nature of these markets not only restricts global participation but also requires traders to place their trust in a third-party operator.
This is where Augur comes in; it was designed to be a trustless and decentralized platform that allows casual and experienced traders to speculate on future events. The functional model is straightforward: correct forecasts are rewarded with money and incorrect bets lose money.
Users can either create their own events or choose an event in which there is already a market for. Then they can trade on the outcome of that event by buying and selling shares in its market.
Buy shares to go long on an outcome, or vice versa, sell to go short. Trading on Augur protocol is done with ETH, and any event could be on the market, from weather to political forecasting, to sports outcomes, to the success of a company’s products.
Another class of crypto commodities is utility tokens. These tokens provide users access to finished goods and services on a blockchain—essentially allowing use of decentralized applications. Utility tokens are distinct from platforms in that they do not provide lower level or horizontal functionality which can be built on top of a blockchain.
To date, the majority of utility tokens run on a platform blockchain which they do not directly control. Most currently employ use of the Ethereum platform to create their tokens. In the future, it’s possible utility tokens may be able to operate on multiple networks to serve multiple appcoins.
These tokens are used to establish an extra layer of service to address a specific need, and they have teams who create applications on top of the blockchain protocol or applications which run on that specific token.
Thus the valuation model of these tokens is often driven by supply and demand as well as the individual properties of the tokens.
Here at Intelligent Trading Foundation, the ITT token is used to purchase access to premium subscriptions for our trading signals.
After purchasing ITT on a cryptocurrency exchange, you can choose a plan and transfer the required ITT tokens to get started.
The plan will provide you with expert advice and concise cryptocurrency trading insights to help you make informed decisions in the markets. For more about our team, token, and plans, see the Intelligent Trading Foundation website.
Another prime example of utility tokens comes in the form of BAT, which are tokens designed to revolutionize the digital advertising industry. The primary aim of these tokens is to pay publishers for their content and to pay users for their attention. What is more, BAT also aim to provide advertisers more return for their ads (e.g. more accurate ad targeting and consumer data).
This token utilizes the Ethereum blockchain to anonymously capture and send user data collected by its Brave Browser.
The Brave Browser is an open source, privacy-centric browser programmed to block malvertisements and trackers, while also containing a ledger system to accurately reward publishers when users view their content.
Users must download and install the browser in order to be rewarded with tokens. The browser will then monitor user behavior to identify patterns which can be used to target advertising specifically to that user.
Users are rewarded BATs for their time and attention to ads, while publishers are equally rewarded BATs for their efforts. More on BAT here.
Security Tokens represent a claim on a specific cash-flow or off-chain asset. These tokens can provide holders with benefits like dividends, profit shares, or voting rights.
Ultimately it is the expectation of these future profits, like an investment contract, which drives contributors to buy security tokens. The anticipation is that contributors will benefit from dividends, revenue share, or (most commonly) price appreciation.
BNB was created as a token native to the Binance platform, one of the biggest exchanges on the market.
Along with receiving a high level of stability, BNB token holders are also allowed to pay transaction fees in BNB on the Binance exchange for a rebate incentive, with fees discounted 50% over the first year of membership. With every subsequent year, however, the fee discount decreases, until on the fifth year there is no longer a discount.
BNB is an ERC20 token, and has a total supply limited to 200 million, after which point no more coins will be created.
Digix tokens (DGX) are a security token backed by a real-world asset (in this case, gold). Every 1 DGX token is said to be backed by 1 gram of gold.
The gold is safely stored in an independent third-party custodial vault who Digix works with in Singapore. Independent audits of the vault happen quarterly and annually, and all digital ownership, transaction, and inventory records are accessible to the public at any time. This ensures transaction visibility and that there is little possibility for collusion.
DGX is an ERC-20 token issued and minted through a suite of smart contracts written by Digix and known as the Proof of Provenance (PoP) protocol. By tracking the movement of the asset from the vendor to the vault, this protocol ensures there is always a total weight of gold in the vault equal to the amount of tokens minted.
While there are many different approaches to crypto asset classification, the key take away from all of this is, traders can benefit from grouping crypto assets into classes based on similar functional goals and features. Use-cases should also be considered in classification, as well as how specific sectors of assets as a whole may react in regards to the market.
Ultimately, in order to realize success, traders need a broader perspective of the current market to identify potential opportunity and risk. With the wide variety of different crypto currencies and commodities and tokens in today’s market, classification is important not only to managing your asset allocation strategies but also to improving your risk-adjusted returns and maintaining a satisfactory level of precision to allocate across the total market. The more informed you are, the more likely you are to achieve this.
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