Cryptocurrency Investment Classifications


Cryptocurrency Investment Classifications

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By Block Society

Cryptocurrency Investment Classifications

 In the rapidly changing environment of the blockchain industry, sometimes we need to take a step back to clearly enumerate the ways in which blockchain investments are made. Not much about the blockchain industry is intuitive just yet, much less the ways that blockchain investments are made.

 

One might surmise that the investment activity for blockchain is restricted to simply buying, selling, holding, and/or trading cryptocurrencies but this misses the big picture by a long shot. There are three broad investment activities that persons or entities may apply to gain exposure to the blockchain sector.

 

1)     Indirect Investment: establishing, developing, or investing in startups or well-established companies that incorporate blockchain in their business without any token offering.

This investment category gains an indirect exposure to the blockchain sector. Instead of investing in cryptocurrencies, one could invest in legal and well-established vehicles that pertain to blockchain. For example, a significant source of Nvidia’s income comes from the mining rigs that it sells; one could bet on the future of blockchain by investing in either Nvidia or an ETF consisted of firms involved with the blockchain business. Similarly, Overstock’s foray with its ZERO platform puts it in this category.

 

This type of investment does not need to be restricted to large companies; any decentralized application (dapp) that uses any external blockchain network also lies within this category. Although the successful dapp CryptoKitties was a low-key project, it highlights the potential that a powerful, blockchain-agnostic dapp backed by an investment might achieve.

 

 2)     Direct Investment (Centralized): establishing, developing, or investing in entities that incorporate blockchain in their business via its own token.

 This investment category is by far the most popular investment choice for venture capital firms. However, the risk is quite high as there is often limited or no liquidity for this sort of investment. Such an investment backs up a project – one with at least some sort of formal organization – that has a cryptocurrency. In this context, the cryptocurrency project is sometimes an ICO or a legal firm. The token itself is also sometimes considered as a security. Two examples of this investment category are Blockstack and Dfinity.

 

 3)     Direct Investment (Decentralized): developing or investing in decentralized projects with loose, if not nonexistent, governance.

 This investment category should be the most familiar one to the public. Bitcoin, Monero, and Iota are few such examples. High liquidity and loose governance are two of the characteristics to look for. This investment category is also where a broad spectrum of trading strategies emerges thanks to the liquidity. Day traders, swing traders, target traders, scalpers, and margin/leverage traders – along with the traditional, buy & hold (“hodl”) investors – control the market and practically shape the entire cryptocurrency industry.

 

 It should be noted that a blockchain project may share characteristics of more than one investment category from the above. In reality, the full picture may be more nuanced but the above would serve as a helpful guideline for classifying the various investment categories in the blockchain sector. The industry is rapidly evolving, and the legit investment categories will also evolve in tandem with time.

 

 

This Post Has 2 Comments

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