Is your Crypto a Store of Value, Gas, or something else?
There are numerous investment products available in the traditional investing world: stocks, bonds, commodities, etc. With each asset type comes its own unique risks, benefits, and nuance. To succeed, it is essential investors understand the differing functions and risks of their asset types.
The CryptoSpace, like traditional markets, has multiple asset types as well. Many new cryptocurrency investors struggle to understand this. As such we propose several categories that cryptocurrencies can be classified as. In general there are four main asset types that currently exist in the cryptoworld: Stores of Value (StoVa Coins), Network Utilization Coins (UtiliCoins), Equity Coins (EquiCoins), and Stable Coins.
Category 1: Store of Value Coins – StoVa Coins
The first generation of cryptocurrencies were designed as digital Stores of Value. Their purpose was to replace fiat currency as the medium for transactions. In other words, StoVaCoins are meant to be used in place of fiat to buy and sell things. The hope is that their use will be as ubiquitous as Dollars and Euros. Bitcoin is the classic example of a StoVaCoin, it can be used to buy and sell pizza, cars, houses, and even other cryptocurrencies. Other StoVaCoin examples are Litecoin, DASH, NEM, Monero, and ZCash.
StoVaCoins are in many ways similar to gold, they have value because we agree they have value. Some of this has to do with their rarity. The amount of gold on earth is the same today as it was 1,000 years ago. Since gold, like cryptocurrency, cannot be created (it must be mined) there is a limited supply. This limited supply assures that wealth was not created from thin air. Unlike fiat, no one can print themself more gold or more Bitcoin which makes them good stores of value.
Another feature of StoVaCoins is they generally do not provide a function outside of their purpose as a store of value. Owning Bitcoin allows you to use the Bitcoin blockchain however it does not have the functionality of smart contracts, computing power, or other uses that other tokens offer. Some StoVaCoins, like LiteCoin, are working on this functionality and may become the next category of coin: UtiliCoins.
Category 2: Network Utilization Coins - UtiliCoins
UtiliCoins are more than stores of value, they are programmable currency that power their blockchain’s unique function. Within the Utilicoin category there are 2 subcategories: PlatformCoins and ProductCoins.
PlatformCoins, also known as Gas, are highly functional. They can be used to power transactions, as collateral, and stored in contracts. Imagine the blockchain is a backhoe available for all to use. In order to use the backhoe you just have to put in the gasoline to power it. Users will put just enough gas into the backhoe to dig the trench they need then the backhoe becomes available for the next person to use. PlatformCoins are the metaphorical Gas running the blockchain just like how gasoline powers the backhoe.
Ether is the prototypical UtiliCoin. Ether can be used to deploy smart contracts or access the Ethereum Virtual Machine. This lets people make applications that run on the Ethereum blockchain, execute conditional transactions, or deploy their own ERC20 based cryptocurrency. The cost of this valuable function is Gas (a fractional amount of Ether) that gets paid with every transaction.
ProductCoins are less versatile. They are typically used to buy one thing that their blockchain specifically offers. Coins like SiaCoin, Storj, and Golem are PlatformCoins. These coins are used to access a specific distributed resource. SiaCoin and Storj offer access to distributed file storage and Golem offer access to distributed computing power. Many of the current AltCoins are Utilicoins.
An important distinction between StoVaCoins and Utilicoins is that while StoVaCoins become more valuable as their use as a currency increases, UtiliCoins become more valuable as NEED for the utility they provide increases. In the example of SiaCoin and Storj, as people and companies start using Sia or Storj to store their data, the value of Sia or Storj will increase. Similarly, as more decentralized Apps are built on Ethereum, the price of Ether will increase as it will be needed for Gas. Ether has the dual benefit of being used in real world transactions like a StoVaCoin as well.
Category 3: Equity Coins - EquiCoins
EquiCoins confer ownership rights or provide an income stream to their holders. These coins will ultimately be classified as securities by the US Government. (Disclaimer: This is purely our opinion. We are not law experts or financial advisors and these statements should not be used speculatively.) The typical design of an EquiCoin is that the funds from the ICO develop a product then when the product is launched EquiCoin holders earn dividends based off of the product’s use. These dividends could come from fees or profits collected by the blockchain. We say these are securities because they do not pass the Howey Test, the standard by which securities are defined dating back to 1946.
We would classify coins like Iconomi (ICN), the now defunct DAO token, and Etheroll (DICE) as EquiCoins. For instance, holders of Iconomi have “ownership of the ICONOMI platform, allowing their holders to receive dividends and vote on ICONOMI related issues” as discussed in their whitepaper. These coins clearly do not pass the Howey Test and should be treated as Securities or, more precisely, Equities because of this.
EquiCoins derive value the same way stocks do: dividends. Iconomi and Etheroll are not used to make transactions nor do they power their respective blockchains. Instead, they earn dividends from their holders based off of fees for using their service. Iconomi plans to open a trading platform and will pay Iconomi (ICN) holders dividends on their investments using the fees they collect from the trading platform. Etheroll pays DICE holders dividends directly from earnings received through their gambling platform. EquiCoins may soon face regulation from the US Government and may be de-listed on exchanges that trade with US citizens.
Category 4: Pegged Coins - StableCoins
The purpose of a StableCoin is to keep the value of the coin pegged to some other asset. This generally results in a great deal of stability in the coin’s price. StableCoins offer investors safe haven in times of high volatility and market uncertainty while keeping investors in the cryptocurrency marketplace.
Typically the value peg of StableCoins is fiat currency. These coins are designed to be the cryptocurrency equivalent of the US Dollar, Euro, or Chinese Yuan. Many StableCoins like NuBits and BitUSD failed in the past due to shockingly dumb management decisions or coding. However, one StableCoin called Tether (USDT, EURT) has thrived. Tether keeps an equivalent amount of cash in reserve for every coin it distributes. You can double check this fact here.
In the future we expect governments will release their own cryptocurrencies adding to the StableCoin category. For instance, China could release their own blockchain based Yuan/Renminbi. This blockchain based Yuan would be equivalent in value to that of a paper Yuan. Government backed cryptocurrencies could be placed in their own 5th category of cryptocurrency (GovCoins?) however they would fit equally well in the StableCoin category.
The Future
At present there are 4 general types of cryptocurrencies in circulation. It is very important for investors to understand the differences between each category of coin. We expect many of the StoVaCoins to eventually be re-classified as UtiliCoins as more development takes place (for instance, if Bitcoin implements smart contracts). We are open to any suggestions on further classifications or naming schemes.
Tip Jar
- Bitcoin - 1CFSxj1dy4a9B4ZYwvDmdds8zB3unNSW2t
- Litecoin - LZxBp3QAZ2SDheN8FaRVHg4nuWPnWAQSdP
- Ethereum - 0x009561fC7CF8656c53EB0874c601DC359E40f76f
- NEO - ANwvg4giWPxrZeJtR3ro9TJf4dUHk5wjKe
- Dash - XkAGSD83Mb9TD4whTeJ6SQawBh56WjwUEM
- Ripple - rEfV4j3Jhzj1BW8948ePHTPEnqCf9cxt7w
- IOTA - YMPFQWXQYHT9DDJVGDGY9SNCSB9F999UDAVWLGXGEIBPHUXJYHQDVWMFFWCTSUTMIUDFNQIBUTQUJGSWZCKMHUOKTB