The SEC recently approved ethereum etfs. Combined with the bitcoin etfs which started trading earlier this year, this means about 66% of the total crypto marketcap will soon be accessible to the investing public in their regular brokerage accounts and retirement accounts. More crypto etfs are sure to follow in the coming years as the crypto ecosystem matures.
As with any new product, wall street and investment advisors will be trying to separate out crypto as a shiny new alternative asset class, which should be included in a portfolio for diversification. I don’t want to get into whether it makes sense to invest in crypto tokens. I do, but I'm weird. No, what I want to clarify here is that crypto is not a different asset class from what already exists.
There are a few things which i consider true asset classes:
Cash/Currencies - the medium of exchange in a localized economy.
Equity - a share of ownership in a business. This ownership share usually entitles you to a share of future cash flows from the business.
Debt - lending out your cash/currency with the expectation of repayment with interest at a future date.
Commodities - raw materials which are produced to meet a market demand.
Investment contracts/derivatives - contractual agreements where payment between parties is based on specific market triggers or conditions.
Collectables - finished goods with the potential to gain value due to rarity and cultural appeal.
Thats it. The vast majority of investments are just variations of the above. For example “real estate” is often separated out as an assets class, but many real estate investments are actually investments in equity, debt, or collectables associated with physical spaces.
Treasuries, corporate bonds, and peer-to-peer lending are often separated into different asset buckets. But they are all variations of debt investments. They basically only differ in the amount of counterparty risk you are willing to take on.
Crypto confuses people because there exist crypto tokens which look very similar to all of the above asset classes. Bitcoin and ethereum are network currencies. Maker and Uni are a form of equity token. Aave and compound allow you to deposit funds and issue you a debt token which accrues interest. There exist tokens representing gold and other commodities. Pendle, GMX, Ethena and many other crypto trading platforms allow you to enter into investment contracts. And of course there are many nfts issued as collectables available for trading on crypto marketplaces.
This diversity of token types leads many to conclude that crypto is a new asset class. But that is the incorrect conclusion. Crypto is not a single new asset class. Crypto networks are economies which can have all forms of assets types inside of them. Cryptographic networks are really a new form of database. They are ledgers that can record ownership and transfers of any arbitrary asset. With crypto we did not create a new asset class, we only made recording ownership of assets and trading of assets more efficient by putting representative asset tokens on crypto rails.
When you evaluate a crypto token for its investment potential, do not treat it as a separate unique asset class where investing rules don’t apply. Instead evaluate what type of asset the token represents and do your analysis on it under that scheme. Is it an equity token? Evaluate the growth and income potential of the underlying business. Is it a debt token? Consider counterparty risk and interest rate. Is it collectable? Consider its potential for cultural significance and rarity.
Framing the crypto investments in this way will keep you grounded when crypto mania comes roaring back.
Fran
