Are Cryptocurrencies an Asset Class?

 

For the purpose of this blog, I understand and appreciate that everyone is aware of how volatile cryptocurrencies are and that they are high-risk investments. I will focus more on the fundamentals of what makes crypto an emerging asset class and briefly discuss the various value drivers of different cryptocurrency types. This is not investment advice and not an endorsement of any cryptocurrency above another.

I would like to cover several points –

  1. Whether or not all cryptocurrencies should be classed as part of the same asset class
  2. Why ‘some’ cryptocurrencies should be a part of some investors’ portfolios
  3. And whether or not cryptocurrencies are an asset class at all

One of the largest problems with cryptocurrencies is that when individuals speak about them, they class them under the same umbrella. I would posit cryptocurrencies do not make up a just singular asset class, but rather several recognized asset classes with distinct value drivers.

At the time of this writing, there are more than 5,200 cryptocurrencies (according to coinmarketcap.com) and potentially hundreds more not listed in their directory. To understand why there are so many cryptocurrencies and where the market is going will take another article. In order to summarise, I can simply say that at this point in time, anyone, anywhere with an internet connection can launch their own “cryptocurrency” and list it on exchanges. This has led to individuals or groups launching their own cryptocurrencies with absolutely zero utility, using ICOs (Initial Coin Offerings) to raise billions of dollars in funding, and others just launching outright scams. So, when one asks, “Are cryptocurrencies an asset class?”, they are grouping all of these in one basket under the same umbrella.

The majority of all of cryptocurrencies are powered by blockchain technology, which many believe is an innovation as powerful as the internet itself. I, having dedicated the last few years of my life to this field, believe it is as well.

I would break out the different categories of cryptocurrencies as follows:

  1. Bitcoin
  2. Protocol Tokens – ETH, EOS, XLM, etc.
  3. Application Tokens – BAT, Siacoin, Nexo, etc.
  4. Stablecoins – USDT, USDC, DAI, etc.
  5. Bitcoin Copycats – Bitcoin Cash, Litecoin, Nano, etc.
  6. Security Tokens – Financial Instruments or backed by ‘real world’ assets
  7. Others

To summarize, it is important we start classifying these assets in different categories as the industry matures and moves forward.

But why should a handful of cryptocurrencies be a part of every intelligent investor’s portfolio?

For the purpose of this section, I will focus and comment purely on Bitcoin (BTC) as it is the market leader with 65% of the market share and because most — if not all — other cryptocurrencies follow Bitcoin’s lead in price movements.

Bitcoin is a non-correlated asset. By that I mean, over its lifetime, it has not been relevantly correlated to any other asset class from the traditional world such as stocks or commodities such as gold. As such, an intelligent investor would hedge their position by having an allocation to Bitcoin to alleviate systemic and market risk.

The technology that powers Bitcoin, known as blockchain, has the potential to transform many businesses around the world, in a way similar to how the internet has transformed businesses. A recent survey of global family offices shows that nearly 90 percent believe that artificial intelligence will be the next, largest, disruptive force in global business. After this, 50% of family offices believe blockchain technology will be a disruptive force,  which will fundamentally change the way people invest in the future. This is because many blockchain protocols are laying down the foundation for the new Internet, known as Web 3.0, and investors can now own assets that allow them to benefit from the growth of these networks.

So, are cryptocurrencies an asset class at all?

Cryptocurrencies are a relatively new industry, but in the short time they have been around (11 years) they have managed to grab the world’s attention. The Bitcoin whitepaper was launched on the 31st of October 2009. Since inception, Bitcoin has been among the best- performing assets of the past decade, if not the very best. Without a CEO, marketing team, or any central company behind it, Bitcoin has managed to appreciate from effectively having $0.00 in value to an all-time high value of roughly $20,000. Its market cap, at peak values, exceeded $250 billion and currently sits over $100 billion.

This is because of the nature of Bitcoin, the asset. Some would call it the hardest form of money ever created. Further, many other cryptocurrencies have unique characteristics that will enable them to build a better future and more inclusive world for everyone because it allows us to do things that were not possible before in a more efficient and trustless manner.

So yes, cryptocurrencies are an asset class, and one of the top-performing ones at that.

As for some of the ways to invest in cryptocurrencies, my colleague has written a blog about that.

 

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This article is strictly for educational purposes and isn’t to be construed as financial advice.

 

 

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