The Case for Using a Digital Asset Taxonomy
In our digital assets educational events, we often poll the audience to get a pulse of what comes to mind when they think of digital assets. The most common response is typically “Bitcoin.”
But the digital asset ecosystem has evolved an incredible amount beyond just Bitcoin. Without an in-depth understanding of the full digital asset marketplace, however, it can be difficult to categorize where a digital asset might fit within the overall ecosystem to better understand any potential use cases.
In 2008, when pseudonymous Satoshi Nakamoto wrote the Bitcoin whitepaper, there was one predominant use case for Bitcoin: a peer-to-peer electronic cash system that didn’t rely on a financial institution.
A new idea and use case for blockchains emerged when Ethereum’s whitepaper was written in 2014 by Vitalik Buterin. The goal for Ethereum was to create a blockchain with a built-in programming language that could be used to write logic with code. The ability to write code on Ethereum revolutionized what we thought of from a blockchain like Bitcoin because it allowed for applications to be created with very different use cases. These different use cases have evolved over the years and created a diverse ecosystem of crypto assets.
By creating a digital asset taxonomy framework using various use cases, it can be easier to identify the value propositions of each network or application. This can help enable any market participant as they seek to implement a process of research, due diligence and valuations to better understand each crypto asset.
Key questions the Digital Asset Taxonomy may help a market participant answer are:
- What type of crypto asset is this?
- What are the use cases of this crypto asset?
- What type of due diligence should I do or trust someone to do on my behalf?
- What type of regulation applies to this crypto asset?
- How can I think about the valuation of this crypto asset?
- As a financial advisor, does a particular crypto asset fit into my client's portfolios?
- As a financial advisor, how do I communicate with clients about crypto assets and their related technologies?
Table of Contents
The Case for a Digital Asset Taxonomy
Important Information Related to this Article
This material is for informational purposes only and contains the opinions of the author, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy or deemed to be an offer or sale of any investment product, and it should not be relied on as such. This material is not intended to provide investment recommendations and is not an official statement of WisdomTree. This material represents an assessment of the environment discussed at a specific time and is not intended to be a forecast of future events or a guarantee of future results. Readers of this information should consult their own financial advisor, lawyer, accountant, or other advisor before making any financial decision.
This document and all information contained in it or otherwise related to this document should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. All information is impersonal and not tailored to the needs of any person, entity or group of persons. None of the Information constitutes an offer to sell or a solicitation of an offer to buy, any security or other asset, financial product or other investment vehicle or any trading strategy. It is not possible to invest directly in an index.
Information provided by WisdomTree regarding digital assets, crypto assets, blockchain networks or technology providers should not be considered or relied upon as investment or other advice, as a recommendation from WisdomTree, including regarding the use or suitability of any particular digital asset, crypto asset, blockchain network, technology provider or any particular strategy. WisdomTree is not acting and has not agreed to act in an investment advisory, sub-advisory, fiduciary or quasi-fiduciary capacity to any advisor, end client or investor, and has no responsibility in connection therewith, with respect to any digital assets, crypto assets, or blockchain networks or otherwise.
There are risks associated with investing, including the possible loss of principal. Crypto assets, such as bitcoin and ether, are complex, generally exhibit extreme price volatility and unpredictability, and should be viewed as highly speculative assets.
Crypto assets are frequently referred to as crypto “currencies,” but they typically operate without central authority or banks, are not backed by any government or issuing entity (i.e., no right of recourse), have no government or insurance protections, are not legal tender and have limited or no usability as compared to fiat currencies. Federal, state or foreign governments may restrict the use, transfer, exchange and value of crypto assets, and regulation in the U.S. and worldwide is still developing.
Crypto asset exchanges, liquidity providers, networks, protocols, settlement facilities, service providers and other participants in the digital asset ecosystem, and/or crypto assets related to the foregoing, may stop operating, permanently shut down or experience issues due to security breaches, fraud, insolvency, market manipulation, market surveillance, KYC/AML (know your customer/Anti-Money Laundering) procedures, non-compliance with applicable rules and regulations, regulatory investigations or orders, technical glitches, hackers, malware or other reasons, which could negatively impact the price of any cryptocurrency traded on such exchanges or reliant on a digital asset ecosystem participant or otherwise may prevent access or use of the crypto asset.
Crypto assets can experience unique events, such as forks or airdrops, which can impact the value and functionality of the crypto asset. Crypto asset transactions are generally irreversible, which means that a crypto asset may be unrecoverable in instances where: (i) it is sent to an incorrect address, (ii) the incorrect amount is sent, or (iii) transactions are made fraudulently from an account. A crypto asset may decline in popularity, acceptance or use, thereby impairing its price, and the price of a crypto asset may also be impacted by the transactions of a small number of holders of such crypto asset. Crypto assets may be difficult to value and valuations, even for the same crypto asset, may differ significantly by pricing source or otherwise be suspect due to market fragmentation, illiquidity, volatility and the potential for manipulation.
Crypto assets generally rely on blockchain technology and blockchain technology is a relatively new and untested technology which operates as a distributed ledger. Blockchain systems could be subject to internet connectivity disruptions, consensus failures or cybersecurity attacks, and the date or time that you initiate a transaction may be different then when it is recorded on the blockchain. Access to a given blockchain requires an individualized key, which, if compromised, could result in loss due to theft, destruction or inaccessibility. In addition, different crypto assets exhibit different characteristics, use cases and risk profiles.