So you’ve heard the hype, and are thinking about investing in cryptocurrencies. Before you decide to make an investment in the cryptocurrency space, do your homework.
The cryptocurrency asset class is emergent. There are some similarities and distinct differences between this new asset class and the existing asset classes (stocks, bonds, and traditional venture capital) that you may have invested in before.
What is the cryptocurrency asset class? Conceptually, how should we think of it?
To answer these questions, let’s review the other asset classes.
What are Stocks?
A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. Stocks are liquid assets. You know that because every time you go online or call your broker, as an ordinary investor, the process of buying or selling stocks is fairly easy and fast.
When trying to value a stock, you are really trying to develop an idea of what the particular company in which you are buying shares is capable of earning in profits. The general idea being that the more in profits the company earns, then over time the better your stock will perform.
Most stock market participants would agree that stocks have intrinsic value based on corporate earnings.
What are Bonds?
A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate.
Pretty simple. Bonds are a loan. Bonds, like US Treasuries, are considered liquid assets.
When valuing bonds we are generally looking at what we “get paid for loaning the money” (interest/coupon rate) and the probability that we will be repaid in full (principal risk). Therefore the more risky the loan, then the more we should charge in interest.
What is Traditional Venture Capital?
Venture capital is financing that investors provide to startups companies and small businesses that are believed to have long term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions. Traditional venture capital is NOT liquid. The investment is tied up longer than with bonds or stocks because the market has less depth (is less transparent and has less participants). Usually, only accredited investors are allowed to participate. When making a traditional venture capital investment, it is common to assume that you will not see the capital return until the startup is bought out or IPOs (initial public offering). This is the downside, the upside being that you get the opportunity to invest in something that could be “huge” but is in such an early stage that the asset (non-public equity) is not trading in a liquid market.
Traditional venture capital employs several different ways of valuing a startup company’s “potential” value. One way is taking the total potential market size, and assigning the company a future share of that market (with caveats/assumptions).
What is the Cryptocurrency Asset Class? Finally… we get to answer the question we started with.
-Cryptocurrencies are liquid. Buyers and Sellers are interacting in a GLOBAL market place. This market is always open (24 hours a day, 7 days a week).
-Cryptocurrencies do NOT represent ownership in a company.
-Cryptocurrencies offer the ability to invest in early stage “bleeding edge technologies” that could potentially completely change existing industries (i.e payments, computing, gaming, etc).
-Cryptocurrencies can be valued using market size analysis.
-Cryptocurrencies are bearer instruments, so securing the tokens is VERY important.
-Cryptocurrencies represent an investment in the future “digital economy” of a given platform. Thus the more active users on a platform, the more likely the “currency” (i.e. Cryptocurrency) will appreciate.
When taking these attributes into account, it becomes clear… The best description of the cryptocurrency asset class is: Venture Capital With Liquidity.Your Remaining Votes (within 24hrs) : 4000 of 4000