According to Coinmarketcap, there are over 20,600 active crypto assets today registered on their platform and there's likely much more out there. Of course, there are many differences between each of these currencies and it can be difficult to understand the meaning and value of each asset.
However, despite that vast range, most crypto assets can be grouped into 7 areas. From these categorizations, you can quickly start to understand the purpose of each asset and prioritize the ones you are interested in.
Network Assets are cryptocurrencies that are the native asset on their blockchain network. Bitcoin is the original and most obvious network asset but shortly after, blockchains like Litecoin and Dogecoin followed suit.
Network Assets have a unique place within the crypto asset space because they have a fundamental utility: Anyone looking to use the blockchain network has to pay transaction and processing fees in that network asset.
What this means is that as long as people find a blockchain valuable and want to use it, there will always be demand for network assets. Today, blockchains like Ethereum & Solana have some of the most used network assets in the space because people can deploy smart contracts on them. Smart contracts let people build decentralized applications that can be more efficient and secure than traditional applications so there are a lot of developers using these blockchains for various purposes and other crypto asset projects.
If you're looking at network assets from an investment perspective, identifying the networks that have growing transaction rates and active accounts can help you identify strong network assets.
Most crypto assets are quite volatile and when people were first interested in trading cryptocurrency, you had to trade peer to peer and completely exit the crypto space into fiat which was obviously annoying and time-consuming.
Cryptocurrency exchanges soon found ways to allow fiat deposits and issue "USD" on their platforms. However, there was no way of verifying that these "USD" issues were real and backed and there were all kinds of incidents during this time with dodgy exchanges.
In 2014, a project called Tether launched. They had set up a banking infrastructure that allowed people to deposit USD to them and then they would issue "USDT" as a token on the blockchain. At any point, these USDT tokens could be sent back to Tether and redeemed for real USD. This model was really valuable to the space because it allowed high net worths and early institutions to enter the space and also take away the risk of being unable to verify each individual exchange "USD" as you could track balances of "USDT" on the blockchain.
Today, there are many stablecoins such as USDC which follow similar 1:1 pegging by storing the equivalent USD in their bank accounts. There are also slightly more experimental stablecoins that use alternative methods to maintain USD value. One of the more well-known of these is DAI, a stablecoin that uses collateral to create and guarantee the value of DAI to the dollar.
Stablecoins are a great tool within your arsenal to navigate the cryptocurrency markets successfully. When there is negative volatility in the space, you can exchange volatile assets for a stablecoin of your choice. Other people within the crypto space like to borrow stablecoins through decentralized finance (DeFi) protocols and it's possible to earn interest through these methods on your stablecoins.
Utility tokens are used to pay for some kind of service on the blockchain. In a way, they are similar to network assets but with a few differences:
- They often focus on a specific use case within an application. They're often used to purchase premium features or give discounts within the application if that means of payment is used.
- They run on top of a blockchain and network asset which means you have to pay transaction fees in the network asset regardless.
As a result, utility tokens have a single purpose and value to people so are much more dependent on building a strong user base and product market fit for their application. Network assets are a bit more robust because they are used by many people for many different reasons. In the long term, if a utility token is unable to grow a userbase, they are likely to fail.
Blockchains allow anyone from anywhere in the world to participate. Many decentralized applications that are built on the blockchain are open source and are community ran. As a result, many projects don't have legal organizations set up as a result of that decentralized reality.
The way that these communities make decisions is by making proposals and voting. As a way to verify good actors and stakeholders in the decentralized application, many projects find a way to issue and distribute governance tokens. If you own a governance token, you have the power to help vote and make decisions on the proposals put forward. In many cases, the more governance token that you own, the more power you have over decisions.
In many ways, governance tokens are like issuing shares in a traditional company. If you are a token holder in a successful decentralized application, it's likely that the value of your governance tokens will rise over time as people want to buy influence within the decision-making process.
Security tokens are a bit rarer within the crypto asset space currently but can possess really interesting value and opportunities. "Securities" are traditional assets such as stocks, property, and others.
Traditionally, managing securities have huge operational costs to ensure legal compliance and reliable record-keeping about the security like ownership. Blockchain has the potential to provide a more efficient and lower-cost system.
Some companies have started to issue securities or tokens that represent securities on the blockchain. These assets often require some additional steps for you to purchase them such as sharing "Know Your Customer" (KYC) information but can allow you to access global investment opportunities you might not have been able to access otherwise.
Traditionally, Derivatives have been financial contracts that represent an underlying asset, index, or interest rate. This holds true to the crypto space but with some slightly different elements that can be represented, here are some of the common use cases of derivatives below:
- Representations of deposits into certain decentralized applications. These derivatives can be used elsewhere if there is demand for them for example, you can borrow stablecoins by using certain derivatives as collateral
- Yield generation can be represented as a derivative
- Non-backed representations of securities. These are high risk but can allow people to have exposure to securities without the friction of KYC. Some protocols have blacklisted these assets because of the compliance issues they can cause.
NFT's probably deserve their own explainer but are a form of crypto asset to consider. Non Fungible Tokens represent ownership and store it securely on the blockchain. Content such as art or intellectual property is a great usecase for NFT's, as the tokens allow ownership to be quickly transferred and verified easily.
Art has really taken off as a usecase for NFT's as Artists have been able to easily distribute art and access brand new markets with their work. However, the risk with NFT's is that, unlike other crypto assets, each NFT is unique and from a financial perspective, this splits buying interest and liquidity up. It can be quite hard to find buyers for your NFT's if it is not a hugely popular market.