What are Cryptocurrencies?
February 24, 2023
Read Time 3 MIN
Please note that VanEck may have a position(s) in the digital asset(s) described below.
Cryptocurrencies are a digital means of exchange that use cryptography for security.
They are represented as tokens or ledger entries on a blockchain network, effectively used to meter the network’s capacity for transactions.
Confusingly, the names of cryptocurrency networks are used interchangeably with the tokens that, technically speaking, are the currencies. Three leading examples of cryptocurrencies are:
- Bitcoin (network) has BTC as a token.
- Ethereum (network) has Ether as a token.
- Solana (network) has SOL as a token.
The demand for any specific cryptocurrency increases the more its corresponding blockchain network is used. Greater demand for the token might well increase its price.
Digital Currencies versus Cryptocurrencies
Cryptocurrencies are types of digital currency.
However, digital currencies also include stablecoins, which are less volatile as they are linked to the value of an existing currency or commodity. For example, Tether is an independent stablecoin that attempts a US dollar peg. Indeed, many countries’ central banks are looking into launching stablecoins. Purchasing stablecoins can be considered as a way to invest in cryptocurrencies oriented at minimizing the associated volatility.
While the cryptocurrency universe is evolving quickly, VanEck has identified the following broad classifications:
- Store of Value: Designed to hold or increase purchasing power over time. For example, Bitcoin.
- Smart Contract Platform: Blockchain protocol designed to host a variety of self-developed and third party dApps. For example, Ethereum and Solana.
- Infrastructure Application: A decentralized computer program designed to perform specific tasks. For example, Polygon.
- Stable Coins: Digital currencies that attempt to peg to a reasonably stable asset such as a currency or commodity. For example, Tether.
- Exchange: Tokens owned and operated by a centralized cryptocurrency exchange.
- Payments: Digital monies operated by a distributed network. For example, Dogecoin.
- DeFi: Financial services built on top of distributed networks with no central intermediaries. For example, Uniswap.
- Metaverse: A currency used to reward users for content, games, gambling or social media. For example, Axie Infinity.
Cryptocurrencies Offer a Variety of Use Cases
People who don’t understand the need for cryptocurrencies usually just don’t see the use cases. What can cryptocurrencies do besides transacting value and data on a global scale?
Capital Asset
- Cryptocurrencies represent not just the value that has accrued over the past but also the value expected to accrue in the future.
- It is valued based on the net present value of expected returns and future use of the network.
- Owners have a claim on the assets’ future network fees for as long as they hold their tokens.
Access to Infrastructure
- Cryptocurrencies are usually needed to use the network which creates a continuous demand for that currency. The transaction fees are paid out to those who help validate transactions. Cryptocurrency is the highway, the toll is the transaction fee.
- Additionally, cryptocurrency owners can earn yield through staking programs by providing infrastructure to network users.
- This creates a clear and predictable business model for the network, its node operators and users.
Store of Value
- Like social media, whose value is mostly derived from the number of users and the revenue that those users generate of the platform, the value of a cryptocurrency can grow with the number of users and number of transactions.
- Many cryptocurrencies can be paired with other assets & “locked” (used as collateral) on decentralized exchanges or used for lending and borrowing.
Network Ownership
- In Proof-of-stake based cryptocurrencies, the native token represents ownership of the network. Token holders may participate in governance by voting for proposals and guiding the path of the network.
- Ownership rights can be exercised, delegated or capitalized on by governance mechanisms built on the network. Active participation is usually rewarded, which incentivizes a strong community to be formed.
Tokenisation of Anything
- The model behind cryptocurrencies allows for anything that can be owned by a single person, both digitally and physically, can now be owned by a larger number of people.
- The token represents a claim on fractional ownership, revenue or interest that the object generates.
- Tokenisation allows liquidity to flow into industries that suffer from liquidity problems.
Global Reserve Currency
- Cryptocurrencies have the potential, without the need for intermediaries, central banks or traditional fiat currency, to become a universal reserve currency.
- Cryptocurrencies possess qualities that enable faster settlement even in a cross-border and cross-currency environment.
To receive more Digital Assets insights, sign up in our subscription center.
Related Topics
Related Insights
Related Topics
Related Insights
DISCLOSURES
Coin Definitions
Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Beta of rig price is a measure of the price volatility of a mining rig compared to Bitcoin’s price.
Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Amongst cryptocurrencies, Ether is second only to Bitcoin in market capitalization.
Solana is a public blockchain platform. It is open-source and decentralized, with consensus achieved using proof of stake and proof of history. Its internal cryptocurrency is SOL.
Polygon is a platform design to support infrastructure development and help Ethereum scale.
Axie Infinity is an Ethereum blockchain-based trading and battling game that allows players to collect, breed, raise, battle and trade token-based creatures known as “Axies.”
Tether (USDT) is a stablecoin (stable-value cryptocurrency) that mirrors the price of the U.S. dollar, issued by a Hong Kong-based company Tether.
Uniswap (UNI) is a popular decentralized trading protocol, known for its role in facilitating automated trading of decentralized finance (DeFi) tokens.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this communication.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the cryptocurrencies mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.
Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.
Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
- An investment in cryptocurrency is not suitable or desirable for all investors.
- Cryptocurrency has limited operating history or performance.
- Fees and expenses associated with a cryptocurrency investment may be substantial.
There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.
Information provided by Van Eck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
© 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
Related Funds
DISCLOSURES
Coin Definitions
Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Beta of rig price is a measure of the price volatility of a mining rig compared to Bitcoin’s price.
Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Amongst cryptocurrencies, Ether is second only to Bitcoin in market capitalization.
Solana is a public blockchain platform. It is open-source and decentralized, with consensus achieved using proof of stake and proof of history. Its internal cryptocurrency is SOL.
Polygon is a platform design to support infrastructure development and help Ethereum scale.
Axie Infinity is an Ethereum blockchain-based trading and battling game that allows players to collect, breed, raise, battle and trade token-based creatures known as “Axies.”
Tether (USDT) is a stablecoin (stable-value cryptocurrency) that mirrors the price of the U.S. dollar, issued by a Hong Kong-based company Tether.
Uniswap (UNI) is a popular decentralized trading protocol, known for its role in facilitating automated trading of decentralized finance (DeFi) tokens.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this communication.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the cryptocurrencies mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.
Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.
Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
- An investment in cryptocurrency is not suitable or desirable for all investors.
- Cryptocurrency has limited operating history or performance.
- Fees and expenses associated with a cryptocurrency investment may be substantial.
There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.
Information provided by Van Eck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
© 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.