The world of cryptocurrencies is like the big bad jungle out there. ICOs, illegitimate projects and rampant volatility in the markets deem this class and industry super risky, unreliable and a downright scam. The same as in the jungle, only the strongest will survive and an attitude of kill or be killed is common. When the internet, accessibility to capital and complete freedom of interactions & advanced technology are combined, some great things come out of the mix as well as some really bad ones. The cryptocurrencies stage is in its infancy despite the fact that Bitcoin was created almost 10 years ago. Until 2017, all of the action was behind the scenes and only nowadays we can see the adoption and acceptance by the public. While regulators and governments are still fighting for the control over the space. Technology companies are being built and created every day. This continuously solidifies the foundations of the space propelling it forward despite the negative valuations and fluctuations of the market.
What is an asset? An economic resource that could be tangible and intangible as such where the ownership and control of this asset produce value. Under this definition, we can fit cryptocurrencies and digital assets under the intangible financial asset type where value can be gained. Capital gains on your assets & currencies can be achieved through the transaction of these on the many exchanges such as Coinbase, Binance and OKex taking advantage of supply, demand and the price action. “Dividend income” from your assets in the traditional world can be seen in the form of the transaction fees collection from master nodes or receiving regular airdrops based on the number of digital assets in holding.
Well, if a certain economic benefit can be gained from these assets there are different levels of varying risk and return associated with them as well. The risk and return trade-offs are the most important for any asset holder & investor. The large uncertainty around cryptocurrencies and the massive volatility has posed some serious risk for people involved in space. Although, a small percentage of these people have reaped massive returns from investing in the industry. This small percentage of people were the one who did their research, study and education on how the blockchain companies work and how cryptocurrencies function. Of course, there is always going to be a tiny part of speculators who just found themselves at the right time in the right place. Although, the general idea of people getting involved into cryptocurrencies through education and knowledge rather than speculation or fraud will only reduce the risks and volatility surrounding this asset class.
Cryptocurrencies and blockchain projects are not only a single financial or digital asset class on their own. There are already many sub-classes and categories of those that are continuously being created around the general needs and inefficiency where they could bring value. Below are sub-asset classes and categories with examples that have seen many blockchain projects being created to deal with issues within these industries:
- Platforms/Protocols – blockchain protocols are the blockchain infrastructure systems which would be the foundation for many dApps such as Ethereum, Neo , Cardano & EOS. The Operating Systems of the 21st Century – the Linuxes, Windows and Mac OS.
- Cryptocurrency – cryptocurrency tokens with the main purpose of a vehicle for value and transactions like Bitcoin, Bitcoin Cash, Stellar.
- Utility tokens – App coins or User tokens built on protocols such as Ethereum that provide access to a product or service like PowerLedger & Basic Attention Token
- Stablecoins – cryptocurrencies that are pegged 1:1 to fiat or converted on a stable and secure basis such as the most popular TetherUSD and upcoming promising projects of GeminiDollar, Basis and Havven.
- IoT – Blockchain solutions for the Internet of Things present a unique use case of 100000s of devices required to be connected to a unified infrastructure where the team at IOTA is working on, for example.
- AI – Big Data infrastructure and enormous computing power paired with large requirements of algorithmic development are the perfect places for a blockchain use case where projects like EffectAI, NumerAI and Matrix are leaders.
- Media & Social – from media content production to social networks being built on different blockchain protocols projects like Steem & Civil
- Tokenized Assets – through the use of smart contracts & tokens a digital representation of your asset ownership information immutability is guaranteed. This way you can tokenize real estate, art, diamonds and precious metals on the blockchain.
- Finance – many use cases in the financial space are present such as exchanges & security tokens such as Binance, ICONOMI & Polymath.
- Cloud – blockchain projects working on cloud solutions such as data storage (Sia) and computing (Golem).
- Supply-chain – enormous potential for blockchain adoption is present in the Supply-Chain sector where projects like Ambrosus & VeChain.
- Gaming & Gambling – these are the sectors where massive adoption on a small timeframe hence exponential fast-growing user base is to be observed and strong players like Augur, EOSBet & Loom
The diversity and development in the space are clearly outlined and moving forward fast despite the negative valuations. Still, we have a number of risks that affect and hold the space back. Regulation being one of the major hurdles as governments and institutions are still at loss on how to deal with blockchain companies and cryptocurrency transactions. SEC, IRS and the Congress in the US being particularly negative towards the sector where ICOs, Crypto Derivative products have been banned and many companies prosecuted due to fraud. Russia, China and India are also heavy on the regulatory aspects banning the use and promotion of cryptocurrencies while the EU is still a bit neutral in many places while others such as Malta, Gibraltar and Zug are positively pushing for the advancement of the space. Other main issues with Anti-Money Laundering (AML) and Know-Your-Customer (KYC) are rampant as most of the funds and capital investments in the space come from unknown or questionable sources due to the lack of compliance and the easy anonymous capital accessibility through the different projects and exchanges. Hacking is a major concern, as well as most blockchain protocols, remain resilient but exchanges and wallets take the hit from the black hats – Mt. Gox, DAO and Parity. Major limitations of custodian and storage risk of digital assets remain complicated due to the range of different service providers and home-grown methods.
Blockchain and cryptocurrencies are still in its infancy and we are yet to see how these companies in the space will develop, crash and burn only to have the future Amazons, Apples, Facebooks and Googles come up as winners. The regulatory environment will develop further to reduce the risks inherent to the industry which will reduce the astronomical returns we were seeing so far, but stability and volatility will mature the sector. On the flipside, there is still enormous potential for growth and 100x returns and the bubble has not popped, as it hasn’t even inflated yet. The next 5 years will be the crucial foundation and massive innovation of Cryptocurrencies where many more companies are going to fail, than the winners that will emerge as leaders.