Many people write and talk about the classifications of cryptoassets and their categories. Investment tokens, utility tokens, currencies, crypto exchange tokens, app tokens and altcoins are all used in attempts to create a cryptoasset system.
Former head of Wartime, businessman, cryptocurrency fund manager, crypto investor and journalist Jake Ryan shared his knowledge about cryptocurrency classifications. The material about crypto assets was published by Hackernoon . An abbreviated translation is presented to your attention.
People like Tom Lee of Fundstrat Global Advisors divide cryptoassets into sectors based on how they are traded. So, Tom Lee highlights the product sectors for commodities, platforms, privacy, exchange tokens and stablecoins. Assets combined into one sector trade in a similar way, and therefore Lee can model trading activity based on their collective attributes.
Some other investors, such as, for example, the general partners of Multicoin Capital , divide cryptoassets into three main cohorts: currencies (storage of value); investment tokens (tokens supported by real assets) and service (work) tokens. This configuration is based on the belief that each of these cohorts has its own distinct scoring model. So, they describe models for the valuation of currencies and utility tokens. You can see that in this classification, according to the creators, platform tokens and currencies do not differ.
Some shortcuts are not effective. An example is altcoins. There are doubts about what counts as an altcoin. Is it any other coin other than Bitcoin and Ether? This is a very large subset and doesn’t make sense.
I think about the classes of cryptoassets a little differently. You can classify mutually exclusive subsets based on logical grouping. Eight different classes of cryptoassets can be distinguished quite clearly: basic assets, currencies, platforms, service tokens, investment tokens, commodity (commodity) tokens, application tokens and stablecoins.
The use of this separation implies that the members of a particular class have similar properties. They have similar goals, scoring systems, and ways of regulating. They often compete with each other and react in the same way to market changes.
I approach classification as an investor: when creating and managing a portfolio, it is very convenient to determine the classification and highlight the most profitable assets within each class. It makes no sense to combine utility tokens, platforms, and application tokens in the same asset class or sector, because this does not provide a satisfactory level of market allocation accuracy. Asset classes can have the same scoring systems, but different goals and different functionality. From the investor’s point of view, it makes sense to distinguish 7-12 classes so that each asset belongs to only one of them and none of the crypto assets remain restless. In this case, the classification will be comprehensive and really useful.
Basic crypto assets
This main class of cryptoassets includes only two cryptocurrencies: bitcoin and ether. Someone may disagree with this, because Ethereum should be at the top of the list of platforms. But its presence in this class is due to the fact that it still has special properties. Ultimately, investors must convert almost any cryptocurrency to Bitcoin or Ether in order to buy other coins later. While Bitcoin and Ethereum differ in many ways, they have high quality in common as assets. There are many compelling arguments that “bitcoin is the core” and that bitcoin should have its own class. However, while these two cryptoassets hold a special momentum in the market, I intend to combine them into a common group.
You can turn to the history of classic money. The entire current global asset structure starts with gold and builds on gold. It used to be thought that the amount of gold a country owned affects how many currencies could be printed. Currency helps to value commodities and issue bonds necessary to generate income in the financial market. Then stocks appear.
While gold is classified as a commodity (for legal and other reasons), it is also considered a currency. It has special properties that convince asset allocators and investors that gold is a separate asset class. The same is true for underlying cryptocurrency assets.
The main advantage of currencies for the market is that they can be used as a digital form of payment. To understand whether a coin or token belongs to currencies, it is worth asking: is it true that the main purpose of this asset is to be a medium of exchange or store of value? Currency must be a medium of exchange, a store of value and, finally, a currency of account.
And although cryptocurrencies are at different stages of development, becoming a currency of account is their common ultimate goal. All coins share the same high regulatory risk as opposed to other asset classes such as utility tokens.
Cryptocurrencies have the same value formula as fiat currencies. The standard exchange equation is applicable here: M x V = P x Q, where M is the money supply, V is the velocity of money circulation, P is the price level, and Q is the volume of production. The cryptocurrency valuation model is largely based on unit costs and, most importantly, on the velocity of money circulation.
All cryptocurrencies try to solve payment problems and they are grouped based on logical principles.
Examples of assets in this class include Bitcoin Cash, Monero, and Dash.
Platforms are some of the most interesting cryptoassets because they enable the creation of smart contracts and programmable money. If any blockchain allows the implementation of smart contracts in one form or another, then it belongs to platforms. Software support for legal and financial contracts will be able to change, accelerate and improve everything that is possible in modern reality.
Let’s imagine the world in ten years. Corporations will become more efficient with the introduction of smart contracts. Governance, voting, contract enforcement, and supply chain shaping and tracking will be revolutionized by the ability to programmatically store and transfer value according to common logic.
We will be able to see where the food came from, which ended up on our table. Land disputes will sink into oblivion, and voting will become transparent and fair.
Platforms provide fundamental building blocks for blockchains such as smart contracts, immutability, and decentralization. Purpose and function distinguish them from other asset classes. They have their own specific regulatory risks compared to other assets. Moreover, the platforms are much closer to legal contracts. The valuation model for such assets is primarily based on network effects.
Examples of assets in this class: EOS, NEO, Cardano, and IOTA.
Service tokens focus on providing services. They represent a function or resource to meet a specific need. These tokens have partners who create applications that lay on top of the protocol or use these tokens.
The pricing model for such assets is also largely based on network effects, but depends on supply and demand. Such tokens are mostly launched on a platform over which they have no direct control over the blockchain. The vast majority of utility tokens are now running on the Ethereum platform. Service tokens differ from platforms in limited functionality, and from applications, on the contrary, in that their stated purpose is not limited to one application or service. In addition, if now they can work on one blockchain, then in the future they will be able to function in several networks to serve several applications.
Examples of assets in this class are BAT, Civic, OmiseGO, and Tron.
Investment tokens differ from the aforementioned asset classes in their functional nature, objectives and regulatory risks. They gain value from being linked to an external asset and are generally subject to securities regulation rules. The valuation model for such tokens is directly related to the valuation of the underlying asset. These tokens are likely to be actively gaining popularity over the next 12 months. Also, perhaps we will be able to see the linking of real estate objects to the blockchain using investment tokens.
So, the main property of tokens of this class is their binding to an external, real asset.
An example of an asset in this class is BCAP.
Commodity (commodity) tokens
This type of token is aimed at providing a real consumer resource. Unlike platforms, such tokens are tied to a specific industry and are intended to be exchanged for resources from a specific subset. These resources include, for example, disk space, processing power, etc.
Their valuation model includes the network effect, as well as dependence on supply and demand for a given resource. Supply and demand, respectively, affect the price, and the risks of deficit and surplus are the most common precursors of price increases or decreases.
Such tokens have a relatively low regulatory risk and are based on their own blockchain.
Examples of assets of this class: STORJ, FileCoin and Golem.
Application tokens, or appcoins, operate on one specific network and are associated with a specific application. Their offer is not limited, unlike commodity tokens. Their purpose and usefulness does not go beyond their own narrow ecosystem. Due to the narrow specialization of this type of assets and their binding to a specific use case in a particular application, their valuation model will be fundamentally different from other asset classes.
Examples of assets of this class: Steem, Binance and SALT.
This type of asset exists in order to ensure stable storage of value. There is currently one major player in this class – Tether. However, this may soon change. There are already several projects aimed at applying different methods to achieve the stability of the price of the coin. This is a new and growing asset class, which we will further evaluate independently based on its stated goals and functionality.
Examples of assets in this class include Tether, Maker, Basecoin, and Digix.
I hope you find this classification example effective. My main goal is to help investors build a portfolio with the right asset allocation to maximize their returns. Indeed, in order to achieve profit, it is necessary to form in your own mind the most clear and relevant picture of the market.