During a webinar I was hosting on the topic of investing in crypto-assets, one of the participants asked me the following question: Which crypto-asset should one invest in?

My answer may seem surprising, but believe me, I don’t know what to invest in. Why? Simply because, at the time of writing this chapter, there are over 13,000 crypto-assets listed on CoinMarketCap. Yes, you read that right, thirteen thousand crypto-assets. So, I ask you again: What should you invest in?

Investing in crypto-assets requires time and prior research. It’s essential to analyze and understand them before making investments. In this first section, we will focus on the characteristics of the main crypto-assets, and in the investment section, we will answer the previous question.

What is a Crypto-Asset?

A crypto-asset is nothing more than a digital asset used and traded on the internet. Crypto-assets have no physical support (such as coins or bills); they are exchanged directly from one person to another (peer-to-peer transactions) and can be grouped into different categories based on their characteristics and objectives. Here is a non-exhaustive list of crypto-asset categories:

1. Store of Value Crypto-Assets
In this category, we have Bitcoin (BTC). As the pioneer of the crypto ecosystem and primarily used as a store of value, just like gold, BTC is limited to 21 million units. It is decentralized and secured by the Proof of Work consensus.

2. Smart Contract Crypto-Assets
These assets enable the execution of smart contracts, the development, and deployment of decentralized applications (DApps). In this category, we find Ethereum (ETH) and Binance Smart Chain (BNB), which use blockchain technology to execute more complex scenarios than simple value transfers.

3. Exchange Tokens
Often associated with specific ecosystems, these tokens are used to pay transaction fees on specific platforms, such as Binance with Binance Coin (BNB) and Uniswap with its UNI token.

4. Privacy Crypto-Assets
This category includes Monero (XMR) and Zcash (ZEC), which focus on privacy and transaction anonymity. They are designed to hide information about the senders and recipients of transactions through advanced cryptography. Contrary to popular belief, it is possible to trace transactions made by most crypto-assets to their source since blockchains are transparent.

5. Interoperability Crypto-Assets
Polkadot (DOT) and Cosmos (ATOM) belong to this category. They aim to connect different blockchains to promote interoperability and enable the exchange of information between them. Interoperability refers to the ability of different blockchains and protocols to work together seamlessly, allowing the smooth transfer of digital assets between them. This facilitates asset exchange, broadens use cases, and reduces costs and delays associated with asset transfers.

6. Governance Crypto-Assets
These assets, such as Maker (MKR) and Tezos (XTZ), integrate governance mechanisms that allow holders to participate in decisions related to the development and evolution of the protocol.

7. Payment Crypto-Assets
These assets are designed to facilitate fast and low-cost transactions, often used for daily payments. Examples include Ripple (XRP) and Litecoin (LTC).

8. Stablecoins
Stablecoins are designed to maintain a stable value by being generally backed by assets such as fiat currencies (USD, EUR) or commodities. Examples include Tether (USDT), USD Coin (USDC), and Pax Dollar (USDP).
There are also algorithmic stablecoins that use complex algorithms to adjust the supply of circulating crypto-assets to maintain their stability, such as Dai (DAI).
The main feature of stablecoins is to minimize the volatility often associated with crypto-assets like Bitcoin and Ethereum.

9. Memecoins
Memecoins are crypto-assets that derive their value and popularity mainly from memes or viral content on the internet. Unlike more traditional assets based on specific technologies and use cases, memecoins are often created humorously and associated with online communities. One example is Dogecoin (DOGE), supported by Elon Musk.

Understanding these nine categories of crypto-assets will allow you to make informed decisions and optimize your investment portfolio.

In the following pages, these categories will be divided into four groups:

• Bitcoin (standing alone to preserve its prominence within the ecosystem).
• Altcoins (alternative coins), referring to all crypto-assets other than Bitcoin.
• Stablecoins.
• Memecoins.

Although some crypto-assets are designed solely for speculation, others aim to solve real-world problems and contribute to the development of the ecosystem.

The Blockchain Trilemma

Blockchains face three major challenges: scalability, security, and decentralization. These three factors are commonly referred to as the blockchain trilemma.

• Decentralization: It represents the distribution of control over the network among multiple nodes. The more decentralized a blockchain is, the more it resists censorship and manipulation, providing greater trust for users.
• Security: It involves protecting the network against malicious attacks and fraud attempts. A secure blockchain ensures transaction integrity and data privacy. For a network to be secure, it must be impossible for an entity to alter transaction states and corrupt the chain.
• Scalability: It refers to the blockchain’s ability to handle a large number of transactions efficiently and quickly. A scalable blockchain can grow to meet increasing demand without compromising decentralization and network security.

This trilemma remains an unsolved issue. It is currently believed that no blockchain can achieve fast transactions, decentralization, and security all at once.

The challenge lies in the fact that improving one of these characteristics often comes at the expense of the others. For example, increasing scalability by allowing more transactions per second (TPS) could compromise decentralization.

Finding an optimal balance between these three elements is a continuous challenge for developers…

This text is an excerpt from the book “INVESTING IN CRYPTOCURRENCIES” written by Eudes Djembo.

We invite you to read the next article: “RISK MANAGEMENT IN CRYPTO INVESTMENT”.