The first category of crypto assets is cryptocurrency, digital money associated with cryptography-based systems (e.g. blockchains). Cryptocurrencies are divided into three main sub-categories: floating (unpegged) cryptocurrencies (e.g. Bitcoins and Ethers), stable (or pegged) cryptocurrencies (e.g. stable coins such as USDC and USDT) and Central Bank Digital Currencies.
We will start by looking at floating cryptocurrencies. The most striking feature of such cryptocurrencies is that their control is decentralized. Unlike a centralized authority that controls its minting and value (e.g. a central bank), floating cryptocurrencies are regulated by the protocols of the blockchain in which they reside.
Key Principles
Crypto currencies usually adhere to certain key principles
- Openness: Holders can use them without relying on financial institutions and proprietary payment networks.
- Permissionless and low barriers: Individuals should not need bank accounts or complex equipment to use them.
- Privacy: Individuals must be able to hold and transfer them anonymously or pseudonymously.
- Public transactions: transactions between individuals shall be public and transparent.
- Accessibility: crypto currencies must be easily accessible and require no special knowledge or expertise to use safely.
Value
Digital currencies such as Bitcoin or Ether derive their value by fulfilling the six characteristics of money: durability, portability, divisibility, fungibility, scarcity, and acceptability. However, unlike other types of currencies (e.g. fiat currencies such as the US Dollar or the British Pound), they are not backed by any current assets (e.g. gold reserves) or future assets (e.g. taxes).
How is the value of such cryptocurrencies determined?
A plausible answer is that their value is driven by the forces of supply and demand; in simple terms by their scarcity and by someone else’s appetite to own them. A good comparison would be with the value behaviour of scarce, collectible and fungible assets (e.g. the value of artworks).
However, due to lack of regulations, it is unclear if speculators can cunningly alter the demand side and pump up or crash their value as they see fit. Therefore, the value of cryptocurrencies is very much volatile. Accordingly, the value of cryptocurrencies need to be assessed against a fiat currency each time they are employed in a financial transaction, as the value is continuously floating. Therefore, their use in invoice financing or other financial services seems limited (an exception is their use in the hedge fund sector, e.g. crypto hedge funds).
Examples of the most popular floating crypto currencies are illustrated in the table below.
| Coin | Price | Marketcap | Volume (24h) | Supply |
|---|
