One of the troubles with understanding the cryptocurrency boom is that the existing definitions aren’t consistent. We call all of these things “currencies”, but that implies that they are all money which is incorrect. For instance, Filecoin is basically a decentralized version of Dropbox. It isn’t a currency at all. It has an exchange value, but it isn’t a “currency” in the traditional sense of the word. This space is so new that the terminology still isn’t very clear. I’ll try to make this short and sweet so let’s see if we can add some clarity here.
I really like where Adam Ludwin, founder of Chain, started with this:
“Here’s my definition: cryptocurrencies are a new asset class that enable decentralized applications.”
That’s a really good start. But I think we need to go further. So, to reiterate the basics – crypto assets are just decentralized networks. Bitcoin is a decentralized payment processing network. Filecoin is a decentralized file sharing network. They’re issued by no particular entity and they are self regulating and self managing. No one can tell you that you can’t own or buy/sell things with Bitcoin because the decentralized network can’t be controlled by an outside entity.
Now, this is where the accounting gets tricky. We know that crypto assets are financial assets. They’re just digitally issued assets. But financial assets have corresponding liabilities. So, who issues the liability? The whole crypto community does! This makes crypto a bit like government debt in that it is issued collectively for the benefit of the entire community. So, every holder of Bitcoin is ultimately liable for its changes in value just like every member of a domestic economy is liable for the value of a government issued currency or debt.
The kicker with Bitcoin and many other cryptos is that they’re explicitly tied to some sort of collective equity arrangement. In the specific case of Bitcoin the collective equity is in the value of the payment system. That is, they have collective equity in the value of the coin because the coin really represents the value that can be derived from the underlying asset. So, when you buy some Bitcoin you are making a bet on the future value of the underlying payment network that Bitcoin gives you access to. You are an owner with equity in a decentralized financial asset. Bitcoin, for instance, is a bet on the equity value of a broader payment system.
“Cryptocurrencies are Financial Collective Equity”
Bitcoin is the easiest one to understand within the context of this definition. Bitcoin can be thought of as virtual gold. Its value is based in the value of its payment network and as this value changes its coin will reflect the rising/falling equity that one has utilizing the payment network. Unlike gold, which is not issued and therefore has no corresponding liability, cryptos are issued specifically by a decentralized community or by related centralized entities in many cases.
Anyhow, I don’t know where I am going with this. I’m not sure if anyone really knows where any of this is going. But I’ve tried to maintain an open-mind about the crypto craze and I continue to think that this is an interesting and potentially revolutionary type of instrument. If you have some thoughts on this please feel free to share them in the forum.
NB – I was tempted to define them as “financial common equity”, but I think that overlaps too much with the existing concept of common equity. Using the term “collective” creates a clear distinction between common equity and whatever the hell these new things are.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.