- 7 Categories of Coins You Should Know (and Own In Your Portfolio)
Just now·11 min read
Crypto is much more than just Bitcoin. In fact, there are over 90.000 cryptocurrencies and crypto tokens on the market today. Over 97% of these will probably become “shitcoins” and lose over 95 % of their value. Yet, there will be hundreds of successful and game-changing projects in a wide variety of industries and use cases.
In today’s article, I want to introduce you to the 7 biggest and most important categories of cryptocurrencies or crypto-projects, what they are, and why they should be featured in your diversified crypto-portfolio.
(This is no financial advice. Know your risk tolerance.)
With over 90.000 cryptocurrencies in existence, it only makes sense to categorize them for a better overview. There are basically two ways to do so:
a) By market capitalization (market cap)
b) By use case and industry
Categorization by market capitalization only makes sense for traders who categorize by pure quantitative numbers. Reasons for such a categorization have to do with the expected liquidity and volatility of a certain category of coins. The pure quantitative focus also implies that the trader or investor doesn’t really care about the nature or industry of the project itself.
Not a great thing to go by if you ask me…
The categorization of cryptocurrencies by market cap basically follows the logic of categorizing shares in the stock market. Hence, the names of the categories are simply large cap, mid-cap, small-cap and — more recently added — micro-caps. The market cap is the sole determinant for the categorization of coins to one of these four classes.
Large cap: Anything above 10bn USD market cap
Mid cap: 5–10bn USD in market cap
Small cap: 500mn–5bn USD in market cap
Micro cap: Up to 500mn USD in market cap
If you want to check which category a specific cryptocurrency belongs to, you simply go to Coinmarketcap or Coingecko, search for the respective coin and check its current market cap.
Two simple but important rules to consider for this categorization, and why it helps for overview, are:
· Liquidity: The higher the market cap and category, the more liquid and easy to trade a coin is. Also, spreads (difference between bid and ask price) will generally be lower as well.
· Volatility: The lower the market cap and category, the higher the volatility of the coin tends to be (unless it is a stablecoin of course).
However, unless you are a daytrader with a short-term focus, you should know much more about the industry and use case of the project(s) you put your hard-earned money in. Hence, it is a much better approach to…
Every crypto-project can be placed into one or more categories, either by the industry on which it focuses or the use case for which its ecosystem is being built. There are more than 20 or 30 of these categories at least, and CoinGecko is especially good in ordering coins by such categories.
For the sake of this article, I want to focus on the 7 biggest categories of coins that have the highest potential in 2022, what their industry or use case is and what speaks for their imminent growth potential.
Vitalik Buterin, the founder of Ethereum, pioneered the idea of using blockchain technology to execute smart contracts — self-executing programmed code. All smart contract-capable platforms, also termed dApp platforms (decentralized apps) can be considered to be layer-1- blockchains if they have their own independent blockchain.
Hence, Ethereum is the most prominent of all layer-1-blockchains. In layer-1-blockchains, the platform’s native token — its cryptocurrency — is usually being used to pay for the execution of transactions. This is also termed “gas fees” as has been coined for the Ethereum blockchain network.
The “layer 1” means that transactions are executed directly on the main chain, not side chains like Polygon (MATIC), a leading sidechain, layer-2-solution, for Ethereum.
Ethereum’s gas fees exploded in 2021 and reached price levels of over 100 USD for a single transaction — an unsustainable price — which is why competing, more efficient layer 1 blockchains have arisen as attractive alternatives. The most prominent layer 1 blockchains are Solana (SOL), Avalanche (AVAX), Cardano (ADA), Polkadot (DOT), Terra (LUNA), Harmony (ONE), Algorand (ALGO) and various others.
The case of price growth of layer 1 blockchains in 2022 is two-fold:
a) General transaction growth: The general number of blockchain transaction increases with growing blockchain adoption overall. This means an increased spending on gas fees to pay for transaction processing.
b) Viable Ethereum competitors: As more and more powerful Ethereum competitors launch in mainnet and provide a viable alternative to the overpriced Ethereum gas fees, more and more companies and users may be willing to switch to other layer-1 blockchains instead. Hence, demand for Ethereum alternatives is going up, increasing interest in and demand for layer-1 tokens.
Here is the CoinGecko list for smart contract platforms (layer-1s).
Blockchain gaming describes all kinds of online games (mobile or web) which have blockchain-based in-gaming items like avatars, skins, weapons, ammunition, etc. issued as NFTs.
Users connect to the games with their crypto-wallets and can fully own their in-gaming assets and in many cases earn money playing (play-to-earn). In the blockchain gaming space, various types of crypto-projects and tokens exist. While you can find a full deep-dive into this topic in my upcoming post on investing in blockchain gaming, the four type of tokens you can find here are:
· Gaming blockchains: Layer-1-blockchains focusing exclusively on blockchain gaming industry. Often offer smartNFT-feature — upgradeable, changeable NFTs. Moderate volatility as can scale with adoption through many games or game studios.
· Gaming studios: Gaming studios that exclusively or non-exclusively develop blockchain games. Token can be used as native token in all blockchain games launched by the gaming studio. Moderate volatility as success not dependent upon adoption of any one single game.
· Gaming guilds: Gaming guilds are collectives training and employing gamers from all around the world. Usually salaried players from third-world-countries are employed to make money and win NFTs for the guild while playing popular play-to-earn-games. Moderate to high volatility, not dependent upon one single game.
· Gaming tokens: Native token of a blockchain game. Can be earned when playing or used to trade (buy and sell) in-gaming-items on the game’s native marketplace. Highly volatile as dependent upon single game adoption.
While blockchain gaming has seen its rise with the success of Axie Inifinity in Q1 2021 and experienced a short but immense bullrun in Q4 2021, it has massively corrected since.
The gaming industry is over 170bn USD heavy and more than 20bn USD are spent every year on in-game items. Due to the better incentives and earning capacity of play-to-earn and blockchain gaming, many experts predict the industry to have much more potential than this.
Important crypto-influencers like Alex Becker and Elliotrades are massively bullish on blockchain gaming and see it as the use case that makes blockchain and crypto go mainstream (as its use case already has 2bn+ proven users worldwide).
Here are CoinGecko lists for Gaming and Guilds.
The metaverse is an immersive digital world that combines elements of social media, virtual reality and cryptocurrencies. Blockchain games are only a part of the Metaverse and digital world.
Cryptocurrencies are essential to building a decentralized metaverse as they provide the efficient and practically cost-free method of transacting value in this digital space; blockchain technology also provides the necessary infrastructure for NFTs that represent all items in the Metaverse.
There are many ways to invest in the Metaverse space, including complete decentralized metaverses (like Decentraland and Sandbox), NFT marketplaces and blockchain games (see section on blockchain games for further sub-categorization of tokens).
Here is the CoinGecko list for Metaverse.
The ultimate vision of blockchain technology is to create the Web3 — a fully-decentralized web. The most essential component of Web3 few people talk about today is a self-sovereign, user-owned identity.
This counteracts the current Web2.0 model where behemoths like Google and Facebook own your data and monetize it with(out) your (limited) consent. With self-sovereign identity, all important user data is owned in the form of verifiable credentials (VCs), just like a different type of crypto-token directly in your user wallet.
Using zero-knowledge proofs, you can prove your identity or information without revealing the exact information (e.g. proving your age without revealing your exact birthdate). Every access to your data by an organization has to be granted by you (using your private key) and is immutably tracked as a transaction on the blockchain. Hence, full auditability and traceability of access to your data is given.
Self-sovereign identity is a killer use case for blockchain but not as sexy as blockchain gaming or DeFi, hence has received too little attention for now. SSI will become an enormously big industry, maybe already in 2022. The biggest projects in this space currently are SelfKey, Civic and MyKey.
Ethereum is the king of all dApp-platforms and unparalleled in market dominance. Its popularity with use cases like DeFi, NFTs and more has made it a victim of its own success. Skyrocketing gas prices in 2021 of over 100 USD per transaction have led users to cheaper alternatives like Binance Smart Chain, Solana, Avalanche and the like.
However, few people like using Ethereum alternatives. Most of them would rather have a cheap Ethereum instead!
Hence, an incredibly strong narrative and crypto category for 2022 are Ethereum Layer 2 Scaling Solutions. There are two ways to scale Ethereum with layer 2 — optimistic rollups or zero-knowledge rollups (“zkrollups”).
A simplified explanation is that layer 2 solutions alleviate the Ethereum mainnet of the computation work for transaction validation, only the transaction result is sent back — “rolled up” — to the Ethereum mainnet.
As computation is done “off-chain”, no high ETH gas fees are incurred. While optimistic rollups are more efficient than zkrollups, the latter are more secure and preferred by all experts in case their usage can be done at justifiable cost and speed.
Crypto-influencer EllioTrades is the strongest driver behind the zkrollup narrative and using practically every chance to push it further. Indeed, ETH 2.0 scaling solutions with zkrollup seem to be one of the most promising, albeit high-risk bets for the crypto market in 2022.
The two alternatives and risks are a successful launch of ETH 2.0 that could reduce the pain points of high gas fees and slow transaction speeds or an increased growth in adoption of alternative layer-1-solutions instead of dependence on the Ethereum mainnet.
To better understand layer 2 rollups, check this page by Ethereum foundation. My personal picks in the zkrollup space are Matic, OMG Network, Loopring and Boba Network. A good overview over projects in this space is offered in this article by CoinMonks.
Filecoin is the most famous, albeit by far not the only decentralized blockchain-based storage solution.
Cloud storage providers like Dropbox, Google Drive, Box and Microsoft Live have implemented content filters in order to protect intellectual property rights or prevent upload of illegal or unauthorized content. Some critics see such upload content filters as censorship and therefore prefer a decentralized, distributed and encrypted alternative.
Enter: Decentralized File Storage. Pioneered by Top-100-coin “Filecoin”, decentralized file storage uses the InterPlanetary FileSystem (IPFS) in order to distribute and store user files redundantly over a vast decentralized network of nodes that provide unused file storage capacity on their hard drives and servers.
Decentralized file storage is set to increase in popularity in 2022 as skepticism and resistance against upload filters and frequent leaks or hacks of centralized file storage providers mounts. The biggest names in decentralized file storage are Filecoin, Arweave, BitTorrent and Siacoin. My personal favorite is micro-cap gem and GDPR-compliant, Barcelona-based Internxt.
Here is the respective CoinGecko category list.
Sports clubs like FC Barcelona have issued fan tokens to engage, monetize and interact with their fans in exciting new ways.
Fan tokens are crypto-tokens issued by clubs or celebrities (e.g. sports clubs) that give owners a right to participate in certain governance decisions or polls and/or gain access to exclusives like private events, exclusive NFTs, etc.
Fan tokens or social tokens give celebrities and clubs the ability to “directly own their audience” and “monetize and engage their fan base” — without the use of middlemen. Currently, celebrities and clubs don’t own their audience, instead they depend on platforms like Facebook, Instagram, TikTok, etc. to engage with their fans.
Famous examples of fan tokens are soccer club tokens like Juventus Fan Token (JFV) or FC Barcelona Fan Token (BAR). Acclaimed macroeconomist and crypto-evangelist Raoul Pal (RealVision) sees “social tokens” or “fan tokens” as the big trend for 2022 or 2023, with them being “potentially even bigger than NFTs and DeFi combined” and completely changing the way communities are built, managed and monetized.
Ways to invest in this category include fan token-issuing platforms like Rally and WHALE (a broader, less volatile approach) or investing directly into fan tokens (highly volatile, very hard to compare in terms of rights granted or access to exclusive privileges).
There is a Coingecko List for Social Money and fan tokens.
Non-Fungible Tokens (NFTs) were arguably the biggest crypto-trend in 2021 and are revolutionizing the art industry and creator economy. The big value in NFTs comes from authenticating and verifying ownership of digital assets. Such digital assets can include images, videos, in-gaming items (see blockchain gaming) or music.
While 2021 saw NFT collections of bored apes, bored ducks and more reach values in the hundreds of thousands or even million dollars (and rightfully causing a lot of facepalms in the process), 2022 will be a big year for music NFTs.
Music NFTs are a complete game-changer for the music industry. Artists can publish and monetize their music directly without needing a record label or streaming service like Spotify to become big stars. What is more, using fractionalized NFTs, artists can revenue-share with their fans who now become co-investors and co-owners of songs.
Together, artist and fans can share the revenue that is made by streams on platforms like Spotify. Already, platforms like Audius or music DeFi (“MusicFi) platform Opulous (my personal favorite) are transforming the music industry and making record labels largely obsolete.
Here is a CoinGecko list for Music.
Few crypto-investors are contempt with only investing in Top 10 coins. Aware of the potential for 5–50x in smaller micro-cap coins, they want to expose themselves to these riskier plays.
With over 90.000 altcoins in existence, investors need structure and method in building a well-diversified and risk-spread, multi-bet portfolio. Diversification of a crypto-portfolio should be done by cap type (large, middle, small, micro) and — more importantly — by industry/use case category. Of course, you always need to take your market experience and risk tolerance into account.
Thematic and strategic crypto-investing should choose 5–7 use cases and industries for building a crypto portfolio. The 7 industries presented in this article represent my opinion for the most promising and potentially lucrative crypto industries in 2022 and beyond (2022–2025). No financial advice.
- Date of publication:
- Wed, 01/12/2022 - 01:32
Click on the link - it will be copied to clipboard