Crypto assets explained
What are the main types of crypto assets, and how do they work? Find out everything you need to know in our easy-to-understand guide
When most of us are asked about crypto assets, Bitcoin instinctively comes to mind. While this certainly is the world’s biggest cryptocurrency in terms of market cap, this barely scratches the surface when it comes to the types of crypto assets out there.
No two crypto asset definitions are the same. And even though two digital currencies may fall under the same category, they often have wildly different use cases. Here, you’ll find a deep dive that provides an accurate snapshot of how diverse the crypto asset market is.
How do crypto assets work?
Now that we’ve covered the different types of crypto assets, let’s delve into the issue of “tokenomics”, which refers to how crypto assets are created and distributed.
Some crypto assets have a fixed supply – and Bitcoin is a good example of this, with an upper limit of 21 million, that are going to be gradually released between now and 2140. But other prominent coins in the crypto asset market have no hard cap at all, meaning that a seemingly endless number of tokens can end up entering circulation. This may not always end up being an attractive crypto asset investment opportunity, as it usually makes it much harder for these coins to appreciate in value. (As an example, more than 45 billion XRP are currently in existence.)
The issuance of many crypto assets is determined by blockchain technology. Some networks run on a Proof-of-Work consensus algorithm, meaning that new crypto assets are only released once miners complete complex mathematical puzzles. Others, such as Proof-of-Stake, rely on validators who have a financial interest in ensuring that the blockchain runs smoothly – receiving a reward every time they add a new block.
In some cases, crypto assets are only generated in response to demand. For example, USDT stablecoins are only minted once someone deposits $1 that is held in reserve. These tokens can then be taken out of circulation at a later date if the crypto asset is sold.
At the time of writing, consumers can choose from more than 7,800 crypto assets, meaning that it’s important to perform some due diligence about a project before investing your hard-earned cash. And there’s something else on the horizon that could end up complicating matters even further: crypto asset regulation.
What are crypto assets classified as?
One of the biggest debates going on right now is how crypto assets should be classified. The US Securities and Exchange Commission has previously imposed strict fines on some projects because their coins and tokens actually fall under the category of securities. But beyond this, it’s clear that crypto assets are going to be subject to stricter rules as central banks and governments begin to catch up with this technology.
Crypto asset exchanges are coming under increasing pressure to ensure that they perform Know Your Customer checks before allowing people to make transactions – preventing digital currencies from being used for money laundering and the financing of terrorism. Tax is also shaping up to be one of the big issues of the 2020s, with the Internal Revenue Service and Her Majesty’s Revenue and Customs ramping up efforts to ensure that crypto enthusiasts pay capital gains whenever they sell their coins for a profit.
What does the future hold for crypto assets?
It’s highly likely that new types of cryptocurrencies will emerge in the years to come. Just look at how DeFi burst on to the scene in 2020, prompting a flurry of governance tokens.
What’s really exciting right now is how this decade is shaping up to be the era where mainstream adoption is achieved in a meaningful way. PayPal is gearing up to allow cryptocurrencies to be used for purchases with millions of merchants, and China is on the cusp of making its digital yuan available to its population.
There will be challenges that lie ahead. The whole notion of decentralized finance, meaning that there isn’t a single person in charge, may not sit well with the strict rules that the EU is hoping to introduce. It also remains to be seen whether central bank digital currencies can peacefully co-exist alongside cryptocurrencies such as Bitcoin. Given there are concerns that private digital assets like Libra could undermine the financial sovereignty of traditional fiat currencies, there may be greater levels of regulatory pushback in the 2020s.
Overall, there’s little doubt that the coronavirus pandemic has transformed our relationship with money forever. Cash was already beginning to lose popularity, but banknotes are now being used even less considering there were concerns they could cause infections to spread.
But there are benefits that cash delivers that cryptocurrencies currently cannot. Many blockchains offer to deliver the scalability that fiat-focused market leaders do, meaning that they’re ill-suited to supporting an entire global financial system. And there will also need to be tough conversations surrounding privacy, given how the humble banknote delivers anonymity that digital methods can’t match.
FURTHER READING: Five common crypto scams you need to know about
FURTHER READING: The best altcoins to invest in for 2021