The chart above represents the price of Bitcoin logarithmically, the way it should be looked at. Pricing and volatility change with the change in liquidity for said asset.
To understand our investment schema, we must understand asset classification in the space:
- Utility tokens — Digital assets backed by some utility or function underlying it for it to work.
- Currency tokens — Digital assets reliant on its demand and supply.
- Security tokens — Digital assets backed by or pegged to real world assets.
The rise in the development of new use-cases and applications in the space, entails the creation of tokens backing those developments. Many people falsely believe in the narrative “Blockchain not Bitcoin”, meaning that the technology underlying it has value, but the currency overlaying it is worthless. A blockchain or blockchain-based protocol without its own token is just an excel sheet distributed amongst computers. The currency is what brings in what’s called “crypto-economics”. This is the foundation of any protocol or platform in the space. The tokens backing these protocols are utility tokens as they back certain utility, which we call “function disruptors” or “function creators”, as they either (1) replace existing functions or (2) create functions that were not possible before the introduction of the technology. With the internet economy encapsulating the physical economy, protocols and functions such as these become absolutely necessary.
Currency tokens on the other hand, are digital assets that are purely based on the economics of their network and the demand and supply for said tokens in the open markets. These tokens are extrinsically backed by their network effects just like any other currency. Let’s understand this concept with the US Dollar as an example. The dollar was taken off the gold standard with the “Nixon Shock” and yet we see the dollar act as the global reserve currency and standard of exchange. This is a result of its network-effects. Network-effects is defined as “the effect described in economics and business that an additional user of goods or services has on the value of that product to others. When a network effect is present, the value of a product or service increases according to the number of others using it.”
Security tokens, in simple terms, are digital securities backed by real world assets. Think shares in a company, REITs on a property, securities backed by commodities, etc. They are just traditional securities, wrapped in the form of blockchain-based tokens.
Each category comes with its own set of characteristics, requiring us to maintain independent research methodologies for each. For example, a utility token would require us to focus on the functions they perform, the value said functions create and their underlying network-effects. Whereas, a security token would require us to fundamentally research its underlying asset.
- Venture economics with market liquidity.
- Piggybacking on digitisation and automation.
- Hedge against traditional assets.
- Inter-connected Finance.
- More regulations. No longer the wild west.
- Intrinsically valuable use-cases.
- Software eating the world.