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The Seven Types of Cryptocurrencies

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Cryptocurrency runs rampant in news headlines, and it’s common to see cryptos compared to stocks. But you’ll have a much better chance of doing well as a crypto investor if you acknowledge this is not the case and know the different categories of cryptos. But first, how and why are cryptos so often compared to and treated like stocks? A few things come to mind:   

  • We can take a chart of the price of Ethereum and compare it to gold or the S&P 500 index over periods of time
  • Wyckoff distribution methods that still apply to crypto coin prices because people treat cryptos like stocks and there is mass speculation
  • Exchanges like Coinbase and Binance have UXs that look extremely similar to those of Charles Schwab or E*Trade

We can see the similarity between the mobile UXs of Coinbase and Schwab:

The two have similar mobile interfaces, but there are big differences between cryptos and stocks. Further, with Robinhood (which you should never use to invest in your cryptos) there is no difference at all between stocks and crypto with trading- both appear the exact same way on the screen. 

The reason why exchanges like Coinbase and Binance do this is because this helps make crypto investing understandable to people not familiar with the asset class/technology. It takes a mental model everyone is familiar with- investing in stocks, and makes crypto investing look just like that. In product management, we call this skeuomorphism- using people’s existing mental models to help them understand a new technology. New things throughout history are littered with this- the first automobile actually looked like a carriage without a horse to show its purpose, and the icons on the original iPhone iOS operating system included a television icon for YouTube and an actual notepad icon for Notes. But regardless of what tech companies have done to help us understand crypto investing, stocks and cryptos are still very different. 

Here’s my stab at the definitions of the two:

Stocks/Equities are slices of ownership of an actual company and are theoretically supposed to be valued as the net present value of all of the future dividends that a company can produce for its shareholders (but there’s mass speculation on stocks just as there is in crypto). Companies make money, and then share some of that money with shareholders.

Cryptocurrency is an umbrella term that encases small divisions of all the different blockchain technologies including stores of value, smart contracts, oracles, payment, privacy, exchange tokens and memecoins. These coins/tokens/etc are stores of value or items that can be staked to help the blockchain function and thus provide economic value to the world. These platforms award stakers with more coins, cut supply, and employ other techniques to increase the value of coins and tokens.

There’s a great video released by Guy over at Coin Bureau discussing the different types of cryptos and what economic value they are attempting to achieve. Knowing which category the crypto you’re investing in is super important before you throw your cash into the ring. No need to go watch the video though, I’ll define the categories for cryptos right here:

  1. Store of Value Cryptos- These are designed to do just that, maintain value or even increase the purchasing power of the holder of the coin over time. Because regular fiat currencies lose 2-3%+ of their value each year due to their respective government owners printing money, the dollar/euro/pound you hold now will likely be worth less in a year. This was the primary reason for Bitcoin (the largest and most famous store of value coin) getting invented, which started this whole shebang. The most comparable prior real world example (and competitor) would be holding physical gold. Only 21 million Bitcoin will ever exist, so it’s very likely that the coin will maintain or increase its value, even with the current level of crypto adoption, which is less than 1.5% of people worldwide.
  2. Smart Contract Cryptos- These are cryptos that aim to make financial services and digital applications decentralized, and have a great number of potential uses. These include but are not limited to providing financial services to the world’s unbanked, combating disinformation, or acting as stores of value (just like Bitcoin). Smart contracts are just lines of code that perform an action automatically once certain conditions are met. Smart contracts are immutable and decentralized, meaning they’re hard to change or hack. Almost all the apps and financial services we use today are centralized- meaning someone could hack a bank’s database or pass a law that censors what content is on a social media platform. With decentralized, bullshit like this becomes extremely difficult. There are no middlemen taking a cut on the contracts or stealing your data and selling it (like Robinhood does with its investors). What you’re buying when you buy one of these cryptos is usually a token which can be staked to earn rewards by helping contribute to the blockchain and supply the computing power to execute these smart contracts. Examples include Ethereum, Cardano, and Polkadot.
  3. Oracle Cryptos- These allow real-world data to be imported into smart contracts. Smart contract cryptos need real world data in order to be used for real world applications. For instance, let’s say there’s a smart contract on the Cardano network that will pay one party with ADA (in a specified dollar amount) when the other party has sent a pair of shoes to that person’s address in the mail. An oracle crypto will be needed to both investigate if the item was sent and sent to the right address (like a USPS confirmation) and will also be needed to check the price of ADA from multiple sources. The oracle crypto will feed this info into the smart contract so that the smart contract can execute. Oracle cryptos are likely to grow alongside smart contract cryptos because the two rely upon each other to function. The largest oracle crypto is Chainlink.
  4.  Payment cryptos- Given the level of technology available to us today, cross-border payments are painstakingly slow and expensive. Merchants around the globe have 2-3%+ of their revenue eroded by firms like Visa or Mastercard just to accept payments from customers. If it involves moving money, you better bet your ass there’s a middle man taking a cut somewhere! Immigrants in America use Western Union (a company founded in 1851) to send money back to their families with transaction fees north of 10%. Payment cryptos offer a solution to that- after all, to be 10x better than Western Union you only need to have a transaction fee of 1%. Payment cryptos don’t live in a bank- they live in a private wallet on your phone or computer. It takes only seconds to transmit or receive at a fraction of the cost of what financial institutions charge today. Examples include Bitcoin Cash, Dash, Terra, and Luna. 
  5. Privacy Cryptos- There’s a big rub with decentralized: most transactions happening on any decentralized apps or crypto networks are publicly viewable in real-time. While no personal identification information  (PII) is required to own a wallet, many of us have traded on or have wallets on exchanges like Kraken or Coinbase that DO have our data. So bad actors could (with some effort) find out who owns which wallet, and how much coin is in each wallet. Yikes! Enter privacy cryptos. These cryptos use a (yep, you guessed it) decentralized approach to solve this problem. For instance- dividing up your funds continuously into new ‘burner’ wallets that have no transaction history is what Tornado does on the Ethereum network. Naturally, government entities like the IRS dislike privacy cryptos because even with all their resources they can’t hack them. The rub with privacy cryptos is that they’re frequent targets of regulatory crackdowns because of this. Examples include Monero, Dash, and ZCash.
  6. Exchange Tokens- Coins like this are probably the most comparable to stocks or equities. Holding an exchange token is much like owning part of an exchange like Binance or Uniswap. These tokens often have perks associated with them including discounts on trading fees. If the exchange does well and grows its user base, the value of the exchange token goes up. Similar to companies with their stocks, exchanges will perform buybacks or burns to increase the value of the tokens held by users. Some of these tokens like BNB have decentralized application (dApp) networks that require the use of their token to perform smart contract execution, boosting demand for those tokens. 
  7. Memecoins and Shitcoins- these are the most volatile and dangerous of all cryptos. These coins exist for no other reason than to make their founders and largest holders rich, and serve no real-world purpose and provide no value- other than a good laugh. People are attracted to memecoins because there’s typically widely proliferated promises of these coins making them rich. Never underestimate the power of animal spirits and the Reddit/social media mob to pump these coins. Examples include Shiba Inu, Dogecoin, and Mona Coin.

As you can see with the exception of exchange tokens, cryptocurrencies differ widely from stocks/equities. The processes for the creation of cryptos and stocks are widely different as well. Before being released to the public, all equities have to go through the same process administered by the Securities and Exchange Commission (SEC). These firms have to be public about happenings within the company via their yearly report (called a 10-K) and report on everything from human capital to carbon emissions to the specifics of debt and the like on their balance sheets in their reports. Cryptos are technical projects that have white papers (with no standard criteria that needs to be met in these papers) which attempt to explain in plain English what the technology means and what the crypto does. It’s way, WAY easier to start a new cryptocurrency and sell it to investors then it is to found a company and take that company to the public stock market, which is why you’ve got to be really careful about the coins in which you’re choosing to invest. As crypto investors we don’t have the same protections and access to information that are available to investors in the ordinary stock market. This means unfortunately we’re more likely to be taken advantage of if we’re not vigilant. We have to be careful, because there are many coins that are carbon copies of other successful coins that exist for no other reason than to make their founders rich. It’s extremely hard to make gains on these coins and time the market right. While a fair number of stocks listed on the NYSE today will blow up or be acquired in the future, a far greater amount of cryptocurrencies we see today will capitulate. Many coins around today have ridden the crypto hype wave and have valuations well beyond reasonable fundamentals, and will see huge declines. Since the crypto asset class is volatile enough as it is, I prefer to stick with larger cap coins in my portfolio (top 10-20 on Coingecko). Cryptos aren’t stocks- and if you want to be a successful investor in crypto or maintain your success it would be wise to keep that in mind.

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