Gone are the days when you should feel sceptical about investing in cryptocurrency. You can now buy bitcoin or other crypto coins with ease of mind, as Bitcoin and some other cryptocurrencies are now considered investable assets. Crypto in general is being considered by Bank of America, Goldman Sachs amongst others as a new asset class.
Although this doesn’t mean bitcoin and cryptocurrencies, in general, will no longer have their idiosyncratic risks. What this means is that they will be more aligned with risk-on assets. And this is partly due to the relatively new and ongoing adopting phase they are going through. So, what exactly are asset classes and why should they influence your decision to buy bitcoin or other cryptocurrencies.
What are asset classes?
In simple words, an asset class is the grouping of comparable financial securities. It classifies assets based on their purpose, types, base of return, or market. Typical examples of asset classes include fixed assets, equity, commodities, real estate, etc. So, for cryptocurrencies to be considered an asset class by financial institutions like the Bank of America or Goldman Sachs, it would have been unheard of.
But how things have changed, as recently there has been a U-turn on the position of different financial giants. Different reasons that impacted why different financial giants assert their position on cryptocurrencies include the benefit and utility of the technology powering them amongst others.
Types of crypto-asset classes?
When classifying cryptocurrencies, people often place them under the same umbrella. When, in fact, all cryptocurrencies are not the same. As such, cryptocurrencies do not make up one singular asset class, but several recognized asset classes. Below are five distinct asset classes of cryptocurrencies.
When looking at cryptocurrency as a type of crypto asset class, bitcoin is what comes to mind. Although some other commodities and tokens can function as cryptocurrencies in a limited setup. However, bitcoin arguably is the only crypto with real relevance. The market cap of bitcoin, trust people have in it, and its scarcity amongst other factors increase its value.
2. Crypto commodities
In the digital space, commodities include storage, network, platforms, protocols, and helping to create tokenized digital products amongst others. Crypto coins like Ethereum can be classified into this crypto asset class. This is because Ethereum has several decentralized applications built on it. Other examples of crypto coins that belong to this crypto asset class include Cardano, Solana, Casper, Polkadot, and so on.
3. Crypto tokens
Crypto tokens are similar or equivalent to finished digital products designed with crypto commodities. Most of these crypto tokens are asset-backed. This means that they are backed by something of real value, such as equity or other digital assets. Crypto coins that fall in this asset class have nothing to do with bitcoin or Ethereum as they are a completely different asset class.
4. Hybrids tokens
A new crypto asset class on the rise is the hybrid token. Hybrid tokens have accrued real economic value. Also, hybrid tokens are part equity, part utility token, and part loyalty, so they have pass-through value. Note that hybrid tokens are at the heart of DeFi, and they propel NFTs.
Lastly, there is the shitcoins crypto asset class, which are crypto coins that have limited use. The majority of them have weak to no use cases. Most crypto coins that fall within this crypto asset are often coins that are pumped by crypto influencers. Be careful of these shitcoins because they are short-lived and drive no purpose.
Why should you invest in different asset classes, especially cryptos’?
When you buy bitcoin and other crypto coins, you diversify your portfolio, thus balancing your risk-reward ratio. The quantity you decide to buy depends on your financial goal and risk tolerance. However, it’s important you invest in different asset classes, and here is why:
– Minimize the risk of concentration
As an investor, you run a higher chance of experiencing significant loss if you invest in only one asset class if it underperforms. But when you buy bitcoin along with other cryptocurrencies, you reduce the risk of concentration. For example, in your portfolio, you can decide to buy bitcoin or Ethereum as 50 – 60%, big market cap altcoin as 30 – 40%, and the remaining 10 – 20% can be penny coins.
– Stabilizes your portfolio
The crypto market as you already know is volatile, however, you must bring some stability to your portfolio. The best way to stabilize your portfolio is by investing in different asset classes. To stabilize your portfolio, you need to buy the right crypto, and that means intense research. Take your time to research different aspects of any cryptocurrency you want to buy.