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A View at the Classification of Cryptocurrencies

In January of 2009 the first genesis block of the Bitcoin blockchain network appeared and started a movement that became extremely popular over the year. This phenomenon is known under a number of names, such as crypto, crypto economy, cryptocurrency, cryptoasset, crypto pet, etc.

By searching on the internet, one can find various publications that relate a cryptoasset exclusively to the cryptocurrencies, but technically, this is not correct. If we make a taxonomy of the cryptocurrencies, this would imply a classification by types and we would easily observe that a cryptocurrency is a derivative of a cryptoasset, which itself is a category of a digital asset.

On various forums there are debates whether the cryptocurrencies are the only cryptoassets existing in the world, but the cryptoassets are not limited only to the cryptocurrencies. The cryptocurrencies have formed the basis for the development of new concepts, such as the crypto cats (Cryptokitties), which is an idea similar to the famous game called Tamagotchi from the nineties. The goal of the game is to raise and care about a digital pet, but unlike Tamagotchi, a cryptokittie could reach the value of up to 12,000 US dollars.

It is important to understand the definition of a cryptoasset. Burniske and White defines the word crypto as a mechanism that allows the involved parties to securely transmit information between themselves using insecure channels. It is the science of securely transmitting messages. Meanwhile, the same authors consider that a cryptoasset refers to the unit of account inside the cryptography security mechanism. The class to which the cryptographic asset belongs to has the following characteristics: capacity for investment, political-economic characteristics, performance correlations (price independency) and risk-reward profile.

Chris Burniske, former member of ARKInvest’s cryptoasset and co-author of the book called Cryptoassets says: “I believe in a taxonomy of cryptoassets that goes far beyond currencies. That said, within its native protocol a cryptoasset serves as a means of exchange, store of value, and unit of account. By definition, then, each cryptoasset serves as a currency in the protocol economy it supports. Since the equation of exchange is used to understand the flow of money needed to support an economy, it becomes a cornerstone to cryptoasset valuations.”

This is why we can define a cryptoasset as a digital asset that represents a value or which is expected to bring economic benefits in the present and in the future and whose main characteristic is the cryptography as an element of security based on a distributed ledger technology (such as the blockchain technology) in order to avoid the double cost and allow it to be traded on the internet.

The cryptoassets can be classified in three groups: cryptocurrencies, cryptocommodities and cryptotokens. The cryptotokens are known as intrinsic tokens and they represent invented resources that have certain utility. Some of these tokens are XRP, a native token of the Ripple network, NXT token of the NXT platform, ETH in the Ethereum blockchain network, etc.

When the time comes to invest in a cryptoasset, we should have the aforementioned classification in mind, since it defines the methodology we should use to evaluate its present and future value.

Various professionals suggest different focuses to evaluate the value of a cryptoasset. Mauricio Guerrero, a certified public accountant, says: “A cryptoassets is a digital asset. The parameters used by the NIC-38 (intangible assets) should be used to evaluate their value, depending on the costs incurred during their development.”

This methodology is not suited for the evaluation of a cryptocurrency, but functions in the case of a cryptotoken and a cryptocommodity. However, this criteria has a disadvantage. Statistically, many cryptoassets reached values much higher than the costs incurred during their development. On the other hand, the opposite has happened as well – various cryptoassets are not worth what they cost to develop.

Ronald Aguilar, a financial analyst says: “A cryptoasset should be evaluated according to a projection of its future cash flow.” Nevertheless, this criteria also has a disadvantage, considering the volatility level and the uncertainty related to all the cryptoassets, is it almost impossible to be reasonable certain in order to make a projection for the future.

When we evaluate a cryptocurrency, we should have in mind the fact that its viability is not based on the generation of income, but instead it depends directly on the participation of the community (the users that use the service, miners in the network and of course, the developers).

Diego Quiros, a professor of economy, says: “A cryptoasset is similar to a stock and this is why its speculation level is a determining factor when it comes to calculating its value.” This tells us it is important to evaluate the image a certain cryptoasset has in the crypto community and also the team behind it.

Chris Burniske says: “The first thing to note with crypto valuations is these aren’t companies; they don’t have cash flows. Hence, using a discounted cash flow (DCF) analysis is not suitable. Instead, valuing cryptoassets requires setting up models structurally similar to what a DCF would look like, with a projection for each year, but instead of revenues, margins and profits, the equation of exchange is used to derive each year’s current utility value (CUV). Then, since markets price assets based on future expectations, one must discount a future utility value back to the present to derive a rational market price for any given year.”

To evaluate a cryptoasset, regardless of its type, it is important to understand that the higher security level on the blockchain platform increases the price of the assets on the market. One of the fundamental things to do when evaluating a cryptoasset is to take your time and not let the moment of euphoria guide you.

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