Since the late 20th century, digitalization has been fundamental to various financial products and markets. In 2008, this transformation entered a new phase with the introduction of blockchain technology and cryptocurrency markets. Blockchain technology is a new digital economic technology focused on peer-to-peer transactions. Cryptocurrencies represent various assets independently of national borders and central banks.
Cryptocurrencies began to attract attention in 2008 with the launch of the first cryptocurrency, Bitcoin. Today, the number has reached approximately ten thousand, considering only those actively traded. Besides, the cryptocurrency market's value is approximately $2.25 trillion, with a daily transaction volume of about $100 billion.
Fundamentals of the Cryptocurrency Market
It would be incorrect to consider cryptocurrencies as speculative assets and blockchain technology as their technological infrastructure. Both the technology and the market have a dynamic structure and continuously host new entrepreneurial applications. Some of these applications provide funding for entrepreneurial projects, while others have the potential to shape the financial world of the future.
The first and most well-known blockchain-based application is Initial Coin Offerings (ICO). ICOs involve the public offering of new tokens in exchange for existing cryptocurrencies to fund blockchain-based projects. Additionally, the "Initial Exchange Offerings" (IEO), which involve centralized cryptocurrency exchanges as a third party conducting due diligence during the public offering process, are also popular.
Security Token Offerings (STO), which record various physical or non-physical assets on the blockchain, represent another aspect of blockchain technology. Moreover, new applications continue to emerge, such as "Decentralized Exchange Offerings" (IDO), which eliminate the need for centralized exchanges and the approval process for listing tokens, and "Initial Bounty Offerings" (IBO), where tokens are awarded in exchange for services.
Ecosystem of Cryptocurrencies
Cryptocurrencies are primarily divided into two categories: Coins and Tokens. Coins include Bitcoin and generally "altcoins" (alternative coins) that have an independent blockchain derived from Bitcoin's open-source protocol. Tokens refer to cryptocurrencies created on another blockchain (typically Ethereum) through smart contracts. However, this classification does not sufficiently detail the complex structure of the cryptocurrency market.
To better understand the complex structure of cryptocurrencies, we can first clarify their position among digital currencies. Today, digital currencies are divided into private digital currencies and central bank digital currencies (CBDCs). CBDCs, which are planned to be issued by countries' central banks, will be the digital form of fiat currencies, although many central banks are still in the project phase.
Private digital currencies, including cryptocurrencies, cover all other digital currencies. Other private digital currencies classified under this category include mobile wallet currencies like PayPal, Google Pay, AliPay, M-Pesa, etc., used via online or mobile applications, and gift card currencies issued by private companies like Visa Prezzy, Apple, Amazon, etc.
Gaming currencies refer to private digital currencies used for in-game purchases. Additionally, loyalty points issued by private companies for purchasing goods and services are also included in the classification of other private digital currencies. In summary, all private digital currencies not issued on a blockchain can be roughly classified as others.
Lastly, when looking at cryptocurrencies, we encounter different categories.
First, payment tokens do not serve any function other than facilitating payments and have no connection to any project. These tokens derive their value from market forces. The first cryptocurrency, Bitcoin, and other cryptocurrencies with their blockchain networks are classified under this category.
Utility tokens are generally issued by entrepreneurial companies through applications like ICO/IEO. Like payment tokens, they do not have a physical counterpart or underlying asset and derive their value from market forces.
Security tokens, issued through STO applications and relatively less common, represent digital representations of various securities or real estate assets such as stocks, bonds, funds, profit-sharing agreements, cars, houses, land, etc. The difference with security tokens is that their value is based on real physical or non-physical assets. Additionally, in most countries, security tokens are subject to the securities regulations of the jurisdiction in which they are issued. The United States, United Kingdom, Hong Kong, and Singapore are among the main countries that regulate STOs as securities.
Non-fungible tokens (NFTs) pair ownership rights with digital assets. NFTs can represent a variety of items, from a painting or other artwork to digital files like photos or videos, even a tweet. The key distinction of NFTs from other cryptocurrencies is their uniqueness. For example, there is no difference between two Bitcoins, and they represent the same value. However, each NFT represents a unique ownership that is not equivalent to any other NFT.
Lastly, stablecoins are issued by individuals or private institutions and have their value pegged to a fiat currency, a basket of fiat currencies, precious metals, or another cryptocurrency.
The categories discussed above only cover the most well-known types of cryptocurrencies. Additionally, interest-bearing tokens (IBTs), which are used on rapidly developing decentralized platforms (DeFi) and provide owners with interest earnings based on specific assets, or governance tokens, which grant owners a say in the management processes of a particular project, can also be included. Furthermore, we can also mention meme coins, often inspired by popular humour.
Conclusion
Compared to the history of many financial markets, the cryptocurrency market is relatively new but continues to bring constant innovation to the financial world. With their increasing numbers and diversity, cryptocurrencies seem poised to continue being significant players in the global financial market.