Crypto Is Not An Asset Class
Category Errors in Cryptocurrency
A couple of weeks ago, my friend Hart Lambur observed that crypto might become a flight to quality asset…
Crypto should be a flight to quality asset, was my immediate thought. But it is unlikely to trade like that anytime soon.
This statement needs to be qualified pretty substantially. When I say crypto here, I’m talking about well-established, stress-tested, audited cryptographically secured assets with pre-determined rates of inflation that are highly unlikely to change. Basically I am talking about bitcoin.
Bitcoin might hold 50% of the overall cryptocurrency market cap but it is still only one of thousands of cryptocurrencies out there, ranging from meme-coins to downright scams. What about these other tokens and coins? I would scarcely classify any of them as flight to quality-grade.
So here is the problem: we tend to talk about crypto as an asset class. But it’s not. Rather, it comprises several asset classes.
Now it should be acknowledged that talking about crypto as an asset class at all was nearly unfathomable just 5 or 6 years ago. Then, bitcoin was largely the only coin in town and it was often viewed more as a technology tool than an investment. But crypto has grown up fast and it is time for the way we talk about it to mature too.
When we talk about crypto as a singular asset class we do the industry around it a disservice and we confuse those investors, entrepreneurs, and institutions looking to get involved.
It is because we classify crypto as a singular asset class that bitcoin is unlikely to be viewed as a flight to quality asset anytime soon. It gets bundled in there with every ICO, utility token, scam, and experiment that has been run in the space.
This singular classification also impacts how bitcoin (and other cryptocurrencies) gets valued. Often investors attempt to apply the same priors and heuristics whether they are talking about bitcoin, petrocoin, or filecoin because they are all “crypto”. This would be akin to applying the same fundamental analysis to gold markets, sanctioned Venezuelan debt markets, and the pre-IPO valuation of Dropbox circa 2008. Not recommended.
It’s time we got more specific in our classifications — or perhaps stopped referring to crypto as an asset class at all. After all, crypto is just the medium by which the asset is created and delivered. We don’t refer to foreign exchange as “SWIFT assets” or blue chip stocks as “DTCC assets”.
It strikes me that saying “crypto assets” is a bit like the Law of the Horse. The Law of the Horse is a phrase that gained prominence in the 1990’s to make a point about cyberlaw:
“The best way to learn the law applicable to specialized endeavors is to study general rules. Lots of cases deal with sales of horses; others deal with people kicked by horses; still more deal with the licensing and racing of horses, or with the care veterinarians give to horses, or with prizes at horse shows. Any effort to collect these strands into a course on ‘The Law of the Horse’ is doomed to be shallow and to miss unifying principles.”
Perhaps the best way to classify crypto assets is to study general asset classification. Does this cryptocurrency function as digital gold? Does it function as a fundraising mechanism for a startup (VC), institution (debt or equity), or state actor (currency printing or government bond)? Is it more like scrip, a form of private money issued for use within a close system? Or is it a whole new paradigm that needs its own classification? Maybe it is just a free open source software project to which you have donated?
At the very least, this kind of specificity might help me save some breath every time I tell someone I work in cryptocurrency. “No, no. Not the crypto of scams and pyramid schemes.”