When you buy a cryptocurrency, what are you actually buying?
Some coins we want to use as a convenience like a pure currency. Others give us access to a platform or app. Generally speaking, we are buying cryptocurrencies most often as investments, with the hope that they will appreciate in value. These function like a currency, but if you’re buying them on an exchange, it feels more like you’re buying a stock. Depending on what coin we’re talking about, it may behave in a lot of different ways.
Personally, I fell in love with Bitcoin because I see it as an independent movement that’s not controlled by any one party being on the path to full censorship resistance. I see a need for a financial system that’s controlled only by the market itself. This is why I hold Bitcoin long term, along with other privacy related coins.
Some cryptos can act like a security and pay you a profit of some kind. For example, TenX (PAY) gives its owners a share of transaction fees. Others grant voting rights for something such as Decred (DCR). Still others can facilitate or pay down a debt transaction (SALT) or even grant an ownership stake in something.
And much like a stock split, ownership of one asset can result in ownership of another, essentially for free. We have seen too many BTC forks this past year, but savvy users received coins like Bitcoin Cash (BCH) and Bitcoin Gold (BTG) just for owning BTC and knowing what wallets or exchanges to use that yielded those coins from the forked blockchain. Still other blockchains grant coins from spin-off projects such as NXT (XEM, ARDR, IGNIS).
At the same time, we often refer to BTC (or even other coins) as a ‘store of value.’ That is a term usually reserved for gold, other precious metals, or real estate.
So, when we look at the overall scheme of asset classes — traditionally stocks, bonds, currencies, real estate, precious metals, collectibles etc., where exactly do cryptos fit? Are these things currencies, stocks, debt instruments, stores of value, or what?
The solution is to designate it as a new asset class altogether. Instead of expecting crypto assets to behave like a currency or regulate them like a security, let’s just acknowledge that they fall under a new and different asset class that has a new set of behaviors and requirements.
In a report called “Bitcoin: Ringing the Bell for a New Asset Class,” Chris Burniske (ARK Invest) and Adam White (Coinbase) argue exactly that.
The basis of their paper is a 1997 paper by Robert Greer called “What is an Asset Class, Anyway?” where Greer defines asset classes in the broadest terms. Greer lays out three superclasses of assets, which include capital assets, consumable/transformable assets, and store of value assets.
Burniske and White recognize a problem with Greer’s superclasses because the lines between these classes can be a bit fuzzy. And even Greer acknowledges this, specifically referring to gold as belonging to both consumable/transformable assets and store of value assets.
This is important because the problem for us is that cryptos completely obliterate the lines between these superclasses.
In fact, a coin can be in any of those three classes, depending on which coin we’re talking about.
Burniske and White lay out their case specifically using Bitcoin “as the first of its kind in a new asset class — cryptocurrency.” Burniske and White go on to evaluate Bitcoin using these four broad categories:
- Politico-Economic Features
- Correlation of Returns: Price Independence
- Risk-Reward Profile
They look at use cases, governance, volatility, trading volume and liquidity, the ratio of people who actually use the currency to investors, absolute returns, and other factors. They specifically make a comparison to gold, as an example of an asset in an established class.
It gets really interesting when they investigate Bitcoin’s Price Independence. They clearly show that Bitcoin has almost neutral correlation with any other class. That means that the price of Bitcoin doesn’t move up or down along with any other broad class of investments. It’s price independent.
What they determine then is that the profile for Bitcoin when viewed as a class is sufficiently different from the other classes to be considered its own category. They even suggest that some of the traditional arguments against Bitcoin, such as it not being backed by any physical asset or governmental assurance, don’t really have as much merit as might be believed. They argue that a purely digital asset shouldn’t be a surprise in an increasingly digital world.
In fact, many of those traditional assets are becoming increasingly digital themselves. Most of our cash is actually digital nowadays, and stocks and bonds are transacted and owned in purely digital terms. When was the last time you actually held a physical stock certificate? That cryptos are purely digital is a fundamental feature of their value rather than merely a tangential fact of a transaction.
That cryptos are arguably backed by computing power or electricity is also possibly a fundamental feature of the asset class. It’s less tangible perhaps than a physical asset or government decree, but just may be a new paradigm for an increasingly intangible world. With smart contracts and increasing blockchain interoperability, cryptos can interact in ways that other asset classes simply can’t. These are features that make cryptos distinctly different as an asset class.
Burniske and White also suggest that there is a problem of nomenclature and recommend a new naming convention. We most often use the term cryptocurrency which tends to lead people to lump cryptos with currencies. But they offer others like “cryptotoken, blockchain asset, or digital asset.” At Crypt.IQ we use many terms interchangeably, but generally agree that cryptoassets is a more formal name that fits the class in general, rather than cryptocurrency.
As you formulate your investment strategy, keep in mind this new paradigm — cryptoassets are a new asset class. They should hold a place in your overall portfolio according to your investment needs and risk profile. Weight your portfolio as needed, keeping a balance between cryptos, stocks, real estate, cash etc. As an investor in this new asset class, you are a pioneer helping to redefine 20th century norms and reshape them into a 21st century investment paradigm.