As Bitcoin was the first ever crypto and was designed to be used in a monetary system, it was labelled a cryptocurrency. The term cryptocurrency stuck and became a catch all term for describing cryptographic, blockchain and distributed ledger technology protocols. However, as the ecosystem continued to grow cryptocurrencies became a less and less accurate way to describe this new asset class. Therefore, the term ‘cryptoassets’ is now commonly used. This can be broken down further into a variety of different classes, let’s have a look at how we should be defining cryptoassets.
Utility Tokens
These are tokens that are related to a specific protocol and are used to operate with them. For example, Peer-to-Peer storage protocols require using their native crypto to interact with the protocol. These can give holders access to services or voting rights.
Security Tokens
These are essentially tokenized shares. They’re proportional to a percentage of the protocol and can give voting rights or ‘dividend’ payments to the holder. These normally fall under existing securities laws and when launched are sometimes referred to as Initial Coin Offerings (ICOs).
Payment Tokens
These would be cryptocurrencies! Their primary purpose is a means of exchange and a store of value. Bitcoin is the largest and most well known. A subsection of payment tokens would be privacy coins. These add extra layers of security and privacy and make it virtually impossible to track payments made on the network.
Stablecoins
Although these are often used as payment tokens, that is not their primary function. All stablecoins are designed for, is to remain pegged to an underlying asset, usually a fiat currency or gold. This is normally done by having the underlying asset held by a centralised entity. In an attempt to avoid this centralisation, there are algorithmic stablecoins – often used in Decentralised Finance. However, these can carry additional risks as they aren’t tied to an underlying asset, rather pegged to a price feed for a specific asset.
Central Bank Digital Currencies (CBDCs) are government issued stablecoins. Although these are not in common use yet, all major central banks have announced development programs for their own CBDC.
Non-Fungible Tokens (NFTs)
These are unique tokens that are not interchangeable. They are non-divisible, scarce and cannot be counterfeited. The most common use of NFTs are as digital artwork or collectables. A growing use for them is in gaming, where NFTs represent rare items or creatures.
Disclaimer: Nothing within this article should be misconstrued as financial advice. The financial techniques described herein are for educational purposes only. Any financial positions you take on the market are at your own risk and own reward. If you need financial advice or further advice in general, it is recommended that you identify a relevantly qualified individual in your Jurisdiction who can advise you accordingly.
