What are Cryptocurrencies?

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.