What is the Fundamental Value of Cryptoassets
What are Cryptoassets?
Analogies are one of the simplest ways to explain new concepts. If we make an analogy between cryptoassets and electronic devices it’d look like this:
Bitcoin ~ iPhone
Cryptocurrencies ~ Mobile Phones
Cryptoassets ~ Electronic Devices
Bitcoin is the first cryptocurrency. Before bitcoin, we had a digital world where all the data can be copied with almost no cost. It is possible to replicate 0s and 1s (bits) in your computer. If you have an image, you can copy and paste the image and have 2 images at little to no cost. If you have a bitcoin you can not simply copy and paste it and have 2 bitcoins. In fact, there are two properties of bitcoins, and cryptoassets as a whole, that differentiates it from other forms of media on the internet: bitcoin is an irreplicable¹ and indestructible² digital asset. These two properties allow for its use as a fungible market currency.
Were there any irreplaceable digital assets before bitcoin?
Before bitcoin, there was only one industry where it was worth making sure that a digital asset has not been copied or destroyed while transferring. It is the finance sector where 92% of all money is in digital form. This is possible due to a set of partially manual operations such as Execution, Clearing, and Settlement. However, these operations are too expensive to be used in other use-cases except for the financial system.
What the use of bitcoin brought is an inexpensive method. Since it makes the most sense to use such a technology in the financial sector, the first app of cryptoassets is money (or cryptocurrencies).
So, Bitcoin is digital money but cheaper. Why does it matter?
Remember the technology behind Bitcoin — Blockchain — actually allows irreplicable and indestructible digital assets. Previously it was too expensive to have an asset class like this. With the Blockchain the cost is so cheap we can now have apps which did not make sense before.
The simplest use-cases are physical assets. Physical assets cannot be copied just like cryptoassets. Now there is a way to represent a physical asset in the digital world. Digital assets have properties like easily divisible and low cost of transfer. A physical asset, like a house, can now be divided into 100 pieces and a single piece can be transferred to a person in the opposite side of the world really cheaply. With more mechanics included, it can be possible to own %5 of 10 houses from all around the world and get %5 of their total rent. These types of assets are called Securities.
Securities are not the interesting part though. I’ll go from the internet analogy. Before the internet one could send traditional mail which was costly since the mail had to be physically transported. The internet provided a way to transfer text (0s and 1s) really cheaply. The first app on the internet was email. Then came other obvious use cases such as bulletin boards and forums. If we fast forward to present, the internet has so many cool apps such as Netflix, Spotify, Amazon, Google Maps, Wikipedia, Paypal… The mutual part of all these apps is they send text through the internet even though they provide such a diverse set of use cases.
Saying Bitcoin is digital cash is equivalent of saying the internet is just email³. It will be possible to have a lot of diverse use cases just like the internet. The internet changed our society from bottom up, cryptoassets will have a similar future. We still have a lot to discover.
¹ Bitcoin can be copied but it’d cost billions of dollars to pull it off (double spending attack)
² It is possible to add the functionality to make a cryptoasset unusable, however, the data can not be lost. For the data to be lost, all participants of the network should abandon.
³ The biggest use case of internet is email. I’d expect that the biggest use case of cryptoassets will be digital cash.