Cryptoassets

Unless you’ve been living in a cave on an abandoned island, you’ve probably heard about Bitcoin by now. In the last few years, it’s been all over the news, as have a handful of other cryptoassets – an unprecedented digital asset class that presents some thrilling new opportunities, both for experienced and amateur investors.

Here’s a narrower definition of a cryptoasset: a commodity consisting of software and an accompanying currency.

OK, but what exactly determines a cryptoasset’s value?

Well, the value of cryptoassets – just like the value of other commodities such as gold or oil – depends partly on market supply and demand. Unlike gold and oil, however, cryptoassets are intangible, and so it’s the value of the software (not of a physical resource) that goes up and down in tandem with the peaks and valleys of the market.

Let’s take a look at Bitcoin to get a better idea of how this works.

Bitcoin, like all cryptoassets, consists of software and an associated currency, “bitcoin” – and therefore, unlike other, non-cryptoassets, it doesn’t fall into a single asset class.

Let’s contrast this with oil, which is classed as a consumable/transformable asset (or c/t asset) – an asset usually bought so that something else can be made from it. Well, the software component of Bitcoin works similarly as it can be used for a number of different purposes.

Bitcoin, the currency, however, is similar to another asset; gold, which is classed as a store-of-value asset. Since gold is rare, beautiful and useful, people worldwide have agreed on its value. Cryptoassets function somewhat similarly – like gold, and unlike government-issued money, there is a finite amount of each cryptoasset’s currency.

So plenty of people buy bitcoin without intention of trading it. Rather, they leave it alone and let it appreciate value over time, as one might do with gold or any other precious metal.

Hence, the cryptocurrencies that succeed will be the ones that are both useful and work as a store of value.

As mentioned at the beginning of the blink, cryptoassets are an asset class unto themselves, but the fact that they fit into multiple preexisting classes only makes them both that much more enticing – not to mention valuable – to today’s investors.