“Bitcoin has outperformed all growth stocks during the pre-covid period to now”. – Real VisionOne of the key advantages of cryptocurrencies is their decentralized nature, which operates independently of governments and traditional financial institutions such as banks. This means that transactions made using cryptocurrencies are not subject to the same regulations and restrictions as traditional financial transactions. Cryptocurrency transactions are recorded on a decentralized ledger called a blockchain, which allows for secure and transparent tracking of transactions without the need for intermediaries. Additionally, because cryptocurrencies are decentralized and operate independently of governments, they are not susceptible to inflation or government intervention in the same way that traditional fiat currencies are. This makes cryptocurrencies an attractive option for those looking to protect their wealth from government instability or inflation. By investing in a variety of cryptocurrencies, investors can spread their risk and potentially mitigate the impact of any one investment underperforming. However, it’s important to note that cryptocurrency is a highly speculative and volatile asset class. The value of cryptocurrencies can fluctuate dramatically and can be highly dependent on market sentiment, regulatory changes and other factors. Furthermore, the crypto market is also highly vulnerable to hacking and fraud. Additionally, cryptocurrency is not yet widely accepted as a form of payment, which makes it less useful as a medium of exchange currently when compared to fiat currency. This also implies that it’s less liquid compared to other assets. Despite these initial barriers, the network effects of digital assets continue to expand rapidly. The increasing popularity and recognition of cryptocurrencies have led to the development of more user-friendly platforms, greater public awareness and understanding, and greater support from businesses and financial institutions. As a result, the use of cryptocurrencies is becoming more widespread and integrated into everyday life, from online shopping and remittances to investment and savings. The growth of decentralized finance (DeFi) and other blockchain-based applications is further driving the adoption of cryptocurrencies and helping to establish them as a legitimate alternative to traditional financial systems. Cryptocurrency has come a long way since the introduction of Bitcoin in 2009. Today, the market is saturated with thousands of cryptocurrencies, each with its own unique features and use cases. To better understand the cryptocurrency market, it is helpful to categorize the different types of cryptocurrencies into sub-categories (note – many digital assets fall under multiple sub-categories!). 1. Store of Value (Bitcoin BTC) – A store of value cryptocurrency is designed to serve as a safe and secure method for holding and preserving wealth over time. These cryptocurrencies are typically seen as a long-term investment and are not necessarily intended to be used as a means of payment for day-to-day transactions. Bitcoin (BTC) is the most well-known store of value crypto. Whilst many cryptocurrencies are seen as stores of value, they can still be highly volatile. 2. Smart Contract Platforms (Ethereum ETH) – Smart contract platforms are a key component of the decentralized technology landscape, providing the infrastructure for developers to build decentralized applications (Dapps) and execute self-executing contracts. Examples include Ethereum (ETH), Solana (SOL), and BNB. Ethereum is the most well-known smart contract platform. It operates on a decentralized ledger, called the Ethereum blockchain, and has become the major player in the decentralized finance (DeFi) space. It allows developers to create and execute smart contracts, which are self-executing agreements that are automatically enforced by the Ethereum network. The use of smart contracts on Ethereum provides a high degree of security, transparency, and efficiency compared to traditional centralized systems. 3. Payment Tokens (Ripple XRP) – Payment tokens are digital currencies designed to be used as a means of payment for goods and services, similar to traditional fiat currencies. These cryptocurrencies aim to provide a fast, secure, and cost-effective alternative to traditional payment methods without the need for financial intermediaries. Examples include XRP, DASH, and XNO. One of the most well-known payment cryptocurrencies is XRP. These cryptocurrencies allow for peer-to-peer transactions without the need for intermediaries, such as banks or credit card companies, and provide a high degree of security and transparency through the use of blockchain technology. 4. Memecoins (Dogecoin DOGE) – Memecoins are a type of cryptocurrency that are created for the purpose of satire, humour, or for promoting a specific cause, meme or internet culture. These cryptocurrencies often have little to no real-world use case and are created primarily for entertainment or as a form of social commentary. However, Memecoins are arguably the most suited to leverage the power of network effects due to their viral-friendly nature. The popularity of memecoins is tied to the communities that embrace them and drive their value through increased demand and usage, creating a self-reinforcing cycle of growth. Examples of memecoins include Vita Inu (VINU), Dogecoin (DOGE), and Shiba Inu (SHIB). 5. Utility Tokens (Vita Inu VINU) – Utility tokens are a type of cryptocurrency that grants access to a specific product or service, often serving as a means of exchange within a specific ecosystem. Examples of utility tokens include Vita Inu (VINU), and BNB. 6. Privacy Coins (Zcash ZEC) – Privacy coins prioritize privacy and anonymity in transactions by using advanced encryption techniques to ‘mask’ the source. These coins aim to provide a higher level of security and privacy compared to other cryptocurrencies. Examples of privacy coins include Zcash (ZEC), Monero (XMR). and AZTEC . 7. Security Tokens (Polymath POLY) – Security tokens are a type of cryptocurrency that represent ownership in a traditional security, such as stocks or bonds. They are subject to regulation and aim to make it easier for individuals to invest in traditional securities using blockchain technology. Examples of security tokens include Polymath (POLY) and tZERO. 8. Stablecoins (Tether USDT) – Stablecoins are a type of cryptocurrency that aim to offer stability by pegging their value to a stable asset, such as the US dollar or Gold. This makes them a popular option for individuals and institutions looking to mitigate the volatility associated with other cryptocurrencies. Examples of stablecoins include Tether (USDT), and USD Coin (USDC), which are pegged to the US dollar via collateralised reserves. As the cryptocurrency industry continues to evolve and mature, it is likely that these trends will continue and that cryptocurrencies will become increasingly accessible and widely accepted as a means of payment, investment, and store of value. The combined value of all cryptocurrencies is currently just over USD 1 Trillion dollars. This compares to USD 10 Trillion dollars for Gold, and USD 30 Trillion dollars for the S&P 500. Digital assets are still in the early stages of development, and still have a long way to go before they reach their full potential.
”The ‘animal spirits’ are back”. – John Maynard Keynes; on human emotionsThe advent of the cryptocurrency market has marked a paradigm shift in the digital asset landscape and its presence is here to stay. Cryptocurrencies offer a unique blend of decentralization, security, and innovation that is driving their increasing adoption and integration into the global financial system. It is ever-changing. It is volatile. It is exciting. And it heralds a new future.
“The future will be decentralized”. – Charles HoskinsonThis article was the result of a collaborative effort between the new and exciting technology of ChatGPT, the insights of our in-house crypto specialist George Rozos, and edited by Jill Nes.
This publication has been prepared by BMF Asset Management Pty Limited (ACN 092 277 971, AFSL 224035), to provide you with general information only. In preparing it, we did not take into account the investment objectives, financial situation, or particular needs of any person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information without consulting us or your financial adviser.