One of the main problems related to crypto (digital assets or virtual currency) is that many people (in the ‘1st World’) who operate in the crypto sphere think of it as a monolith; that it’s one thing. Depending on one’s financial literacy and understanding of digital assets in general, you likely think of them as digital cash (like a dollar), currency (like the Dollars, Euros, or any fiat currency), or an investment (like a stock or bond). The truth is: that some digital assets are some of those things, but none is all of them (they literally cannot be), and this confusion is not only problematic for these investors (because it means that your investments might frequently or constantly or continually be mistargeted), but it contributes to the chaos within virtual currency which adds to the instability that keeps it from ever solidifying the way crypto and tech evangelists hope it can (and will). It is in the world’s best interest that digital assets be understood and engaged with accurately, so let’s see if we can clear up some of this confusion.

[Please note I am not a financial planner, nor is this intended to be financial advice.]

If the presumption is that digital assets are a currency or a form of money, let’s think about how we think about money, how we use it, and how we hold it. We tend to think of money as a pretty simple thing, but the reality is money, or currency in various forms, is very complicated. (So is crypto, which we’ll get to soon.) Below is a breakdown of traditional asset classes:

Cash and cash equivalents: Liquid current assets highly usable and accessible at a moment’s notice.

Bonds: Similar to an IOU, a bond is a debt security. Borrowers issue bonds to raise money from investors, who earn interest on the bond until it is repaid.

Stocks: Also known as equities, stocks are a type of security that gives stockholders a portion of ownership of a company.

Mutual Funds: A mutual fund is a financial vehicle that pools assets from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets

ETF:  Exchange-traded funds; a type of fund that holds multiple underlying assets (rather than only one like a stock does) and trades on an exchange (just like a stock does).

This is not an exhaustive list of types of asset classes (other forms include real estate, private equity, hedge funds, commodities, and an array of others), but suffice it to say, money and assets take on many different forms and perform many different functions. And when it comes to money, as in most things, where you sit determines where you stand, and how much money you do (or don’t) have has significant implications on how you understand and interact with money. To categorize broadly, let’s say that any person falls into one of four groups: low wealth, mid wealth, high wealth, and ultra high wealth. Which group you belong to probably shapes how you think about money, how you use it, and what you use it for.

Clearly, people of differing financial levels tend to use money differently. There are a number of factors responsible for this tendency, but chief among them is financial literacy. After all, how can a person use a financial tool if they aren’t aware it exists? That is a conversation for another time, but for today, what should be noted is that we all get dollars and use them for different things based on our needs, our beliefs, and our comfort with financial instruments.

Regarding financial literacy as pertains to crypto, the common mental model is to think of them as equivalents to money. And while we appreciate the subtleties and distinctions between categories of money, people broadly assume crypto is money, plain and simple. In reality, crypto is as complex and complicated as traditional currencies and assets, if not more so. We recognize that stocks and dollars and bonds and mutual funds are not the same things. Still, we tend to see cryptocurrencies as equivalents of cash and that the difference between Bitcoin, Ethereum, or Dogecoin is equivalent to the difference between Nike, Reebok, and Adidas, which is wildly inaccurate.

The fact is, just as there are different classifications and categories of traditional assets, there are different classifications and categories to crypto, each with unique functions, benefits, and liabilities. In the same way you can’t buy a new car with stock. You can’t pay for groceries with a crypto asset that functions as a commodity. It would be convenient if crypto were a simple, straightforward asset class, but as we’ll see, that’s literally impossible.

The average person may believe that crypto can be used as fiat currency. Some may think it can be used like gold, others think of crypto ownership as buying access to a certain ecosystem of apps and products, while others think it is like owning a stock. These views may actually be correct for specific types of currencies, but one thing that a currency or token CAN NEVER BE is all of those things. In broad terms, it is fundamentally impossible for one thing to be all, or even more than one, of these things. (For the purposes of this discussion, I am excluding hybridized financial instruments and things that are clearly flawed/scams from the crypto world.) The reason is simple: if we assume everyone is acting rationally, any financial instrument serves a specific purpose, and that purpose determines the reward you get for holding based on the risk of holding it.

Crypto is precisely the same. Certain digital assets are meant for exchange, others are meant to power an ecosystem, and others are meant to serve as a store of value. It all comes down to the design and intended use of the cryptocurrency or token. It's worth noting that the digital asset space does not offer a perfect analogy to traditional financial instruments, as cryptocurrencies and tokens have unique properties and characteristics that make them distinct from traditional financial instruments. However, drawing parallels to traditional instruments can help provide a basic understanding of the different types of digital assets and how they might fit into an investment portfolio.

To understand why design and use matter, think of an asset designed for use as a medium of exchange may be optimized for low transaction costs and fast transaction times. In contrast, an asset designed as a store of value may be optimized for stability and security, with the tradeoff being longer transaction times. An asset designed to act as an investment may be optimized for growth potential and liquidity, or give you other unique benefits for holding it. While it's certainly possible to design assets with different characteristics and intended purposes, it's unlikely that one type of asset can be used interchangeably with another without first exchanging them. After all, you can't trade a bond for a mutual fund without first exchanging the bond for cash and then purchasing a mutual fund.

While it's possible that some features of these assets may overlap or be shared (such as the ability to transfer them between users), the specific design and intended purpose of each asset will likely impact its functionality and potential uses. Furthermore, the value of each asset will be based on the supply and demand dynamics of that specific asset and its perceived value by the market participants.

At this point, hopefully, it is clear why digital assets are not one size fits all, so the question becomes: what kind of digital asset should you involve yourself in based on your goals and needs? Before we get too specific, let’s apply some definitions to cryptocurrencies and crypto tokens. These terms are often conflated or used interchangeably, but they are distinct from each other in important ways.

Crypto Currencies: a digital currency, with a decentralized network that facilitates peer-to-peer transactions. These cryptocurrencies typically have their own blockchain, or are built on top of blockchains to help solve certain pain points with the original blockchain. It is key to note that these currencies have functionality beyond being a means of exchange: certain currencies can serve as a store of value because of their decentralized nature, or in some cases like a stock when they power an ecosystem.

Crypto tokens: A crypto token is a digital asset that is created and managed on a blockchain network. Just like currencies, they are exchangeable and tradeable. Like cryptocurrencies, they also have the ability to represent an interest or a stake in a company but then also act as legal tender.

Crypto tokens can be broadly broken down into 5 categories, which are listed below. Note that each has a distinct purpose, so it has a distinct design with key features.

• Utility Tokens: These are tokens that are designed to provide access to a specific product or service within a blockchain ecosystem. For example, the Golem Network Token (GNT) is a utility token that provides access to the Golem Network, a decentralized supercomputer network.

• Security Tokens: These are tokens that represent ownership in a real-world asset, such as equity in a company or shares of a real estate investment trust (REIT). Security tokens are subject to securities laws and regulations.

• Payment Tokens: These are tokens that are designed to function primarily as a means of payment, facilitating transactions between users. For example, Litecoin (LTC) is a payment token that is used to send and receive payments on the Litecoin network.

• Governance Tokens: These are tokens that are used to participate in the governance of a blockchain network or decentralized organization. For example, the Compound Governance Token (COMP) is used to participate in the governance of the Compound lending platform.

• Asset-Backed Tokens: These are tokens that are backed by a real-world asset, such as gold or fiat currency, which provides stability and helps maintain their value. For example, USD Coin (USDC) is an asset-backed token that is pegged to the value of the US dollar. These are also known as stablecoins as they are less volatile due to being pegged to other currencies.

(It's important to note that the classification of a cryptocurrency token can sometimes be ambiguous, and some tokens may have characteristics of multiple types. Additionally, the regulatory status of cryptocurrency tokens can vary depending on their classification, so it's essential to do your own research and seek professional advice before investing. A quick reference to make sure the asset you're considering is safe is the Commodity Futures Trading Commission's page, where you can check the regulatory status of an asset - click here to find out more.)

Now that we have a  rough awareness of the different forms of cryptocurrencies and tokens and what they can do, you can hone in on determining which one fits your investment or financial goals.

When it comes to crypto, like most things in the world, “where you stand depends on where you sit.” Your own personal situation will determine what you want out of a crypto investment, the same exact way it does for any other investment or use of money. This article is intended as a starting point to clear up the confusion surrounding cryptocurrencies. A typical crypto investor mistaking a currency’s classification and function contributes to the ever-present turmoil within the crypto space, which only elongates the instability of the various currencies and the market as a whole. Future articles will elaborate how mismatched investment and speculation in crypto hurts the market, and the people around the world who rely on digital assets over their local fiat currencies. But for now, hopefully you feel equipped to take a more informed approach to this nascent, evolving, and fast-paced arena, which is poised to be an economic juggernaut and an enormous opportunity in the coming years.

If you feel like you struggle with financial literacy and need to start somewhere, check out this article, with some basic principles to get you pointed in the right direction.