Cryptocurrencies from the ground up: what are we actually trading
Introduction
We have been active in the cryptocurrency market for years, and it is easy to forget how high the barrier is for an outsider trying to understand what this market actually consists of, what is traded on it and what opportunities it offers. This article aims to explain, as simply and concisely as possible, what it is all about.
Blockchain
A blockchain is a database – specifically a ledger – that records who owns how much of which asset and who sent what to whom. A bank works on the same principle: an account balance is a row in its database, and its accuracy is guaranteed by the bank and the regulator. A blockchain operates without a central administrator. Copies of the ledger are held by thousands of independent computers around the world, which agree, according to fixed rules, on which new entries are valid. The units of the assets recorded on a blockchain are generally called tokens. These computers are rewarded for verifying entries in the network's native token. Transactions are grouped into blocks, each of which is cryptographically linked to the previous one and cannot be altered after the fact.
Ownership works through a pair of keys: the public address serves as the account number, and the private key is the only means of controlling the assets held at that address. Whoever loses the key loses access permanently, which is why institutional investors, our fund included, hold most of their assets with regulated custodians.
The result is systems that run around the clock, settle a transfer to anywhere in the world within seconds to minutes and have a publicly verifiable history – all without a bank or any other third party.
There are many blockchains, each with its own rules and its own native token. Some, such as Bitcoin, are deliberately designed to record a single asset only; others also allow programs – so-called smart contracts – to be recorded on them, and further tokens and applications are then built on top of those.
Cryptocurrencies, or digital assets
Before turning to the individual assets, we need to unpack the word the general public uses for everything in this sector: cryptocurrencies. Although it is an established label, and one we too use for the sake of simplicity, we do not consider it accurate in principle. Today the term covers several groups of assets that have very little in common. In our view, a better common denominator is the broader term digital assets. Cryptocurrencies are only one category within this space – and, by number of projects, the least populated. We divide digital assets into the following areas.
Monetary assets (cryptocurrencies)
Bitcoin and a handful of others. They have no issuer and no counterparty, generate no cash flow, and their issuance schedule is fixed. There is therefore nothing from which to derive an intrinsic value; the price is a function of how much capital wants to hold a reserve beyond the reach of the state. That demand is driven by fiscal and monetary conditions, and it is precisely on these that we assess the group as a whole. Bitcoin is the outright winner of the category and has no direct competition. Among the other cryptocurrencies that have gained at least some traction in recent years are Zcash, which benefits from the privacy narrative, and Dogecoin, which has become an internet meme.
What distinguishes them from the next area is not that these monetary assets lack a network of their own; it is that their network is deliberately designed to do one thing only: transfer a single specific asset. It does not natively support the issuance of other assets. This limitation is a deliberate feature, not a shortcoming – it is the source of their predictability.
Smart blockchain networks
Ethereum, Solana and others. Unlike Bitcoin, these are programmable platforms on which anyone – usually without needing permission – can issue a token of their own, build an application or, say, a credit market. At the same time, they serve as the rails of the entire industry: every token created on them also moves and settles on them.
The native token is needed to pay network fees, and it also secures the network: the computers that verify transactions must lock up tokens as collateral, which they forfeit in the event of fraud. This locking is called staking. These networks therefore have a fee economy and dozens of other observable metrics. They are not companies but open public networks, and the token is the only instrument through which their economy can be owned.
The best parallel is the internet. There was no way to own the internet: its base protocols, such as TCP/IP, had no shares, and the value accrued instead to the applications built on top of them. Blockchain networks invert this relationship: for the first time, the protocol layer itself is directly monetizable – precisely through the native token.
Tokens issued on smart blockchain networks
This is where the vast majority of what is colloquially called cryptocurrencies belongs. Because anyone can create any token on these networks and give it whatever rules they choose, individual tokens serve entirely different purposes and need to be divided further into the following categories.
Stablecoins are by far the largest category: a tokenized dollar, euro or other currency with a fixed price. They are therefore not an investment but a tool. A stablecoin does not appreciate, and the interest earned on the reserves is usually retained by the issuer, not the holder. That is precisely why stablecoin issuers rank among the most profitable companies in the entire industry. There are exceptions where the yield is passed on to holders, such as the Ethena protocol – where, however, it comes from derivatives trades rather than from reserves. In practice, stablecoins serve as the unit of account in which the industry operates: most trading pairs, collateral and payouts are denominated in them. They play the same role in our fund and are also the asset in which the capital of our yield and market-neutral strategies is deployed. We earn interest on them, provide liquidity with them, lend them through decentralized protocols or post them as collateral for derivatives positions.
Tokenized real-world assets are government bonds, gold and other precious metals, money market funds, real estate, private credit and equities – and increasingly also collectibles such as spirits and Pokémon cards – issued in the form of a token. The risk lies in the underlying asset and in the legal structure of the claim. The return corresponds to the return on the underlying plus a risk premium for the issuer and the technology. We hardly ever trade tokenized real-world assets themselves. The tokens of their issuers and of the infrastructure projects that make it possible to trade and otherwise handle them, however, are among the opportunities we actively seek out.
Application tokens with value accrual belong to exchanges, swap venues, lending protocols and market infrastructure. They generate revenue and, beyond the usual voting rights, have a documented mechanism through which value reaches the holder: buybacks, fee sharing or supply reduction. Of all the categories, they are in principle the closest to equities, and a revenue multiple and other metrics familiar from equity markets can be calculated for them. The analogy is imperfect, however, because tokenomics also plays a significant role: the issuance schedule, the unlocking of allocations and the structure of supply.
Governance tokens without value accrual look identical to the previous category from the outside and often belong to protocols with real revenue – except that none of that revenue flows to the holder. They represent a claim on voting rights, not on the economy, and the sharp price declines of recent years have shown how little such a claim is often worth. A substantial share of the tokens issued in recent cycles falls into this category, including projects with high revenue that, given the historically unclear regulatory framework, have so far not dared to pass value on to holders for fear of being classified as securities. This may change with the US CLARITY Act, which is intended to define clearly when a token is a security.
Speculative and attention tokens are memecoins, NFTs and tokens tied to personalities or communities. They have no cash flow and function as a market for attention. Their volumes are a good leading indicator of the market's risk appetite. To a traditional investor, this category may seem utterly absurd. Some argue, however, that many traditional assets today trade at speculative premiums so detached from fundamentals that, in practice, the line between them and assets with no intrinsic value whatsoever is blurring.
Across the areas
This structure has one exception important enough to warrant separate mention. There are projects in which the blockchain network and the product are one and the same: the network was created so that one specific application could run on it, and its token belongs simultaneously to the second and the third area. The most prominent case is Hyperliquid, a decentralized exchange on which derivatives are traded around the clock – not only on digital assets but also on traditional markets. Its token is used to pay fees and to secure the network, which places it in area two. At the same time, the overwhelming majority of the exchange's revenue goes toward buying back that same token, which is the very definition of area three. Both therefore apply at once.
Outside the structure: equities of digital asset companies
Stablecoin issuers, exchanges, custodians, miners and infrastructure providers, in both public and private markets. These are not tokens and do not exist on a blockchain, so they belong to none of the three areas. We include them deliberately: a large share of the value created in the stablecoin industry, for example, ends up precisely here. A typical example is the stock of Circle, the company behind the USDC stablecoin.
One might ask why projects in the digital asset industry generally issue tokens rather than shares. The primary advantage of a token over a share is that it makes it possible to own an economy that a share, by its very nature, cannot reach – for instance, a decentralized protocol that, for legal and commercial reasons, must not belong to any company and for which no share can therefore exist. The second advantage is programmability. All shares are governed by essentially the same rules, whereas every token can have rules of its own, enforced directly by code. Some companies that could in theory issue shares take the token route for more opportunistic reasons as well: easier access to global liquidity and regulatory arbitrage. Launching a token is simply many times easier and faster, and liquidity on decentralized exchanges and swap venues is available immediately.
Conclusion
The differences between these categories are the whole point of this article. Return, risk and even what the price rests on differ so much that the sentence “I invest in cryptocurrencies” carries far less information than even “I invest in securities.” An application token with value accrual, a monetary asset, a governance token without value accrual and a speculative token look identical to an outside observer, trade on the same venues and sit side by side in a market-capitalization-weighted index, even though they are entirely different asset classes. That is why, for every asset, we first determine which category it belongs to and choose our strategy and risk management accordingly.