Ten years ago, the terms cryptocurrencies, blockchain, and DeFi were all remote to us. Fast forward to the present day, and all of these are a part of our general vocabulary. There have also been consistent developments in the crypto assets market.
As per an MMR report, the global crypto asset market was worth $496 million in 2021. The market is expected to grow at a CAGR of 24.2% and reach $2.8 billion by 2029. When thinking of crypto asset definition, the masses always think of the different types of cryptocurrency. However, crypto assets are a broader umbrella term.
The terms crypto assets or cryptocurrency are often interchangeable but differ. While cryptocurrencies are a significant part, the list of crypto assets includes other digital assets using cryptographic technology for their operations. Let us delve deeper and understand the different types of crypto assets that exist.
Overview: Crypto Assets
Since the inception of Bitcoin in 2009, crypto assets have garnered unprecedented attention. The development in the different types of crypto assets had begun before the pandemic, but the technical advancements in the last two years have considerably catalyzed the growth. The growth is reflected in the popular crypto index fund CRYPTO20.
Crypto assets are purely digital assets that run on decentralized P2P networks and use cryptography technology. Their transactions are recorded, verified, and secured using a distributed ledger technology like the blockchain.
The crypto asset management market has offered exponential returns, attracting traders and investors alike. Analysts use market insights such as capitalization, volume, and growth rates to make predictions and investment decisions about the market.
Drivers of the Crypto Asset Market
An IMF activity report recorded 200 million people using and owning crypto assets in 2021, including emerging economies. The total crypto assets on-chain volume was $2.8 trillion in the first half of 2021 alone. The rising acceptance to market cryptocurrency and crypto assets have driven up the volume significantly and are expected to generate high revenue in the upcoming years.
The revolutionary technology has found widespread commercial usage. El Salvador has popularly accepted Bitcoin as a legal mode of transaction. Some Giant corporations have started accepting payments in cryptocurrencies. The widespread application of blockchain technology in voting, money exchange, and store of value purposes is expected to drive the crypto asset market further up.
The World Bank’s analysis suggested that the growing crypto asset volumes are correlated with several global macroeconomic factors. The report states that these factors eventually influence domestic financial conditions as well. For instance, a 0.1 increase in US inflation expectations increased the crypto asset volume by 28 basis points.
How do Crypto assets work?
Crypto assets are decentralized, encrypted digital assets using Peer to Peer networking running transactions on a distributed public ledger. Their ability to store value gave them the vocabulary of assets. They strengthen or diminish in value, driven by demand and supply factors.
Some crypto assets have a finite and fixed supply in the market that they cannot exceed. Thus, its value and utility are determined per its circulating supply on the blockchain. Bitcoin is one such coin with a cap of 21 million coins in supply.
However, there are significant crypto assets with infinite supply. Values of all such assets are determined through the combination of the circulating, maximum, and total supply conditions.
The system behind crypto assets
Crypto assets emerged under a proof of work algorithm. Under this validation mechanism, new crypto assets were developed after miners solved complex mathematical puzzles.
The process is highly energy intensive, and new crypto assets are dropping their use. A University of Cambridge report revealed that Bitcoin mining used up 85 Terawatt hours of electricity. The amount is more than that used by Belgium and Finland.
However, there is a movement toward other validation mechanisms, such as Proof of Stake, which do not require as much energy. Ethereum shifted to a proof of stake mechanism and reported a drop of 99.99% in carbon emissions. In this situation, the validation is depicted through the number of crypto assets a miner has kept at stake.
How are crypto assets classified?
Crypto assets divide into different heads depending on their use cases, dependency, and legal statuses. Thousands of companies and exchanges expose investors to a wide range of crypto assets in the market.
The end goal and functions of these crypto assets are unique. Monero is a currency focusing on consumer privacy, while Ethereum is an application running on smart contracts. Kodak launched its crypto asset to help photographers register their work, while Spotify uses the technology to aid music licensing.
The US Securities and Exchange Commission is very strict about classifying crypto assets or cryptocurrencies. They have imposed fines on coins that fell under the securities category. And with increased regulations, the classifications are more relevant.
Crypto assets can be directly classified into three broad heads as per their utilities and characteristics:
Often confused with crypto assets, cryptocurrencies are the most popular and widely accepted type of crypto asset. They have the essential characteristics of a fiat currency but run on a decentralized blockchain network. The different types of cryptocurrency have different purposes, but they all aim to smoothen transactions and act as a mode of digital currency.
Cryptocurrencies derive their value from the circulating supply and demand of each coin. Their rates also depend on the blockchain and validation system they use for operation. Their utility also drives the value of these coins. Primarily, they are used to replace fiat currencies, as a store of value, or for speculative purposes.
While a central power does not back most cryptocurrencies, there are exceptions like the ones introduced by Venezuela and Russia, which their respective governments back. Crypto asset management platforms like Fireblock Crypto provide custody for the decentralized coins.
Next, crypto assets also exist as tokens running on cryptographic technology. These decentralized tokens are not used for the same purposes as cryptocurrencies but use similar technology. Three types of tokens exist as crypto assets.
Utility tokens run on the blockchain network and provide access rights to a specific product or service that can be bought with it. The tokens are developed with a specific utility and can only be used for that purpose.
Security Tokens are the ones offered in Initial Coin Offerings. They assist businesses in raising funds for a specific business model. Businesses offer these security tokens in exchange for fiat currencies or other crypto assets. Investing in security tokens means investing in the business idea, which might fail.
NFTs are the more popular tokenized assets that give buyers ownership of a unique intangible or tangible object. The value of these tokens is derived from the fact that they cannot be replicated and depict complete ownership of a particular item. The NFT market is rapidly evolving and is expected to reach $13.6 billion by 2027.
Investment funds like crypto mutual funds and ETFs allow you to invest in crypto assets without directly having to buy them. The funds allow you to access, invest, and withdraw cryptocurrencies without trading them. Cryptocurrency mutual funds act like regular mutual funds and are subject to similar market risks.
Like those offered by the Fidelity digital assets, Crypto ETFs do not track a particular crypto index fund. Instead, these ETFs run by tracking cryptocurrencies. Instead of betting on a single crypto asset, ETFs allow you to diversify your investment.
How many crypto assets are there?
The total number of crypto assets for an investor stands at around 1,500. The vast majority of investment opportunities make identification challenging. Proper research and due diligence are required for investments in the crypto asset space. While it does provide stunning results, it has immense volatility.
For instance, while the CRYPTO20 index looks bullish in the short-term, a larger picture shows a drop from $3 to $0.01 around April 2022. The immense fluctuations have made the crypto asset market riddled with uncertainty. Investors are recommended to make investments with a thorough analysis.
Crypto Currency vs. Crypto Assets
The difference between crypto assets and cryptocurrencies lies in the broadness of the term. Cryptocurrencies are considered a subsection of crypto assets. The crypto assets include tokenized currencies, crypto hedge funds, crypto real estate, and DeFi crypto stock.
As discussed, crypto assets run on a decentralized P2P network, with transactions recorded on a distributed ledger. Cryptocurrencies are a type of crypto asset that pose as virtual coins.
Cryptocurrencies are a currency item and have even been recorded as a legal mode of transaction in some countries. However, not all crypto assets are universally accepted. They also include non-currency items such as NFTs and security tokens which cannot be traded for one another. Security tokens provide ownership over ecosystems, including crypto real estate.
Crypto assets evolution has financial innovation at its crux. The decentralized nature and economic inclusion hold the potential for a revolutionary improvement in transactions and storage of cryptocurrencies. The unmatched speed and absent fees influence big-ticket cross-border payments.
Research reports by the World Bank explicitly mention that crypto assets developments threaten financial integrity and monetary sovereignty. However, the positive impact on the market is noticeable too.
Meta, Starbucks, and the country of Venezuela are promoting crypto assets. Investment giants like Blackrock Crypto have recently partnered with CoinBase to expand their crypto offerings. Sentiments for the potential of these crypto assets seem highly optimistic.
Experts believe that the industry is still at its birth stage, and most development is yet to come. Predicting the coexistence of traditional transaction methods and crypto assets takes time and effort. But one cannot deny the powerfully influential technology that blockchain has introduced.